Goldman Sachs: Buy Chinese stocks with foreign assets as yuan falls

PUBLISHED : Wednesday, 16 November, 2016, 2:37am
UPDATED : Wednesday, 16 November, 2016, 2:37am

Chinese companies with overseas businesses and foreign-currency assets will benefit as the yuan’s depreciation accelerates after Donald Trump’s victory, according to Goldman Sachs.

The technology industry could profit the most from a weaker yuan because more than 35 per cent of company revenues come from abroad, said Kinger Lau, Hong Kong-based chief China equity strategist at Goldman Sachs. Energy and industrial businesses will benefit as well with non-yuan sales accounting for more than 15 per cent of their overall income last year.

Exporters could advance, although it may be harder for them to excel now that Trump will be US president, said Lau, adding that the yuan will weaken a further 6 per cent by end-2017.

“Our conviction for firms with foreign-currency financial assets to outperform is even higher after Trump’s election victory, as our conviction to expect a weaker currency is stronger,“ said Lau. ”The Trump presidency means some pure exporters could have a little bit of difficulty to outperform because of the trade concerns in the short term.“

The yuan’s depreciation is a double-edged sword for Chinese companies. While a lower exchange rate makes exporters and firms with foreign assets more competitive, too quick a slide would prompt investors to pull money out of equities.

The currency traded in Shanghai has weakened 1 per cent since the Trump win, falling beyond the 6.83 level that it was pegged to against the dollar after the 2008 global financial crisis. While a gauge of mainland companies traded in Hong Kong reached a three-month low, the Shanghai Composite Index rallied into a bull market.

Goldman’s recommendation comes amid increased pressure on emerging markets, with the odds of a Federal Reserve interest-rate increase this year shooting up to 92 per cent.

China’s 10-year bond yield has risen for seven days, the longest run in three years. A gauge of developing-nation currencies tumbled to an eight-month low and US$1.2 trillion of value was erased from global debt as investors positioned for the wave of US fiscal stimulus that Trump has pledged to unleash. He has also promised to brand China a currency manipulator and impose a 45 per cent tariff on the nation’s exports.

Such a penalty on China’s shipments to the U.S. would knock off 3 per cent from the country’s gross domestic product next year, and that means that China will go through a hard landing and the world economy will suffer, Lau said. This will prompt retaliation measures from China on US goods.

Lau didn’t comment on individual stocks during the interview. In a report last month, before Trump’s shock election win, Goldman recommended seven companies that profited from foreign-exchange gains in the first half of this year. Its picks included China Resources Land Ltd., a property developer that recorded 224 million yuan (US$32.7 million) in foreign-exchange gains in the first half of this year, and Beijing-based energy firm Huaneng Renewables Corp Ltd.

Both firms’ shares are expected to jump more than 30 per cent in the coming 12 months, the investment bank said in an October 13 report. Lau said Monday that those views haven’t changed.

“Whether Trump will levy punitive measures is definitely one of the key risks we are monitoring,” said Lau. “I don’t think anyone has a good handle on that view. In the short term, if concerns of higher US bond yields, weaker emerging-market currencies and US trade relationships remain in place, the overall emerging-market trading involvement will continue to be quite challenging.”