As the coronavirus pandemic rattles markets, global fund managers have been seeking safety in high-dividend stocks, prized for their stability during turbulent times. But Chinese traders are doing the opposite, once again chasing companies that are used to big price swings. While exchange-traded funds focusing on companies with the best history of dividend payouts have posted some of the largest gains recently worldwide, an index of 50 such stocks on the Shanghai exchange has been lagging behind the benchmark this month. A gauge of smaller technology companies has been outperforming any other industry group. Investors face value trap in chasing China’s stock rebound as earnings shrink The decoupling signals a rapid increase in risk appetite in the world’s second-largest stock market, as Beijing shifts focus to restoring growth after containing the Covid-19 outbreak. Dip buyers are betting that Chinese stocks that are 25 per cent cheaper than their US peers in valuation have already troughed. Adding fuel to the rally in riskier, more volatile technology stocks was a recent initiative by top policymakers to spur investment in so-called new infrastructure, such as the fifth-generation (5G) wireless network, cloud computing and internal data centres, to counter the economic slowdown. “It’s sort of a risk-on mode,” said Wang Zheng, chief investment officer at Jingxi Investment Management in Shanghai. “China is doing much better in getting the coronavirus under control than other countries in the world now, which has been reflected in the performance of risk assets.” The Shanghai Stock Exchange Dividend Index of 50 high-dividend constituents including electricity producer China Yangtze Power and Industrial and Commercial Bank of China has risen 1.8 per cent in April, trailing a 2.8 per cent gain in the Shanghai Composite Index. The CSI technology sub-index has rallied 7.6 per cent. The companies tracked by the dividend index pay an average dividend yield of 7.3 per cent, three times the yield of China’s 10-year sovereign bonds, according to Bloomberg data. The tepid interest in Chinese companies with a track record of decent dividend payouts sharply contrasts with the overseas rush for assets that generate stable yields, as the global economy heads for a recession. Coronavirus could weigh on mergers, IPOs longer than Sars, deal makers say The WisdomTree Emerging Markets High Dividend Fund, whose top holdings range from Russian state energy firm Gazprom to China Construction Bank, has gained 5.4 per cent so far this month. Demand for secure returns has driven the yield on 10-year US treasuries down to a near-record low of 0.75 per cent. In Hong Kong, investors even penalised HSBC Holdings for complying with a rule issued by the UK regulator asking it to suspend dividend payouts because of the viral outbreak. Shares of HSBC tumbled 17 per cent last week, their worst five-day performance in 11 years. China’s lift of the lockdown in Wuhan – the epicentre of the viral outbreak – on Wednesday may have further bolstered the case for local traders to steer clear of safe stocks. Meanwhile, the US and Europe are still in the grip of increasing numbers of new infections. “There are encouraging signs that China itself is past the worst,” said Alexander Treves, an investment specialist at JPMorgan Asset Management. “The way in which China returns to normalcy may offer a test case for how the rest of the world could recover too. In the meantime valuations are cheap, but not rock bottom.” To some analysts, the momentum of Chinese growth stocks may strengthen as the coronavirus risk further abates and if economic data improves in the second quarter amid supportive policies. In the latest round of policy easing, China’s central bank lowered the reserve requirement ratio for smaller banks and cut the interest rate on excess reserves for the first time since the global financial crisis more than a decade ago. “With a further recovery in risk appetite, and liquidity remaining adequate, technology growth stocks are expected to deliver above-average returns,” said Lin Sishan, an analyst at Central China Securities. Sign up now and get a 10% discount (original price US$400) off the China AI Report 2020 by SCMP Research. Learn about the AI ambitions of Alibaba, Baidu & JD.com through our in-depth case studies, and explore new applications of AI across industries. The report also includes exclusive access to webinars to interact with C-level executives from leading China AI companies (via live Q&A sessions). Offer valid until 31 May 2020.