Cyclical stocks and valuation advantages to propel Chinese stocks higher this year

UBS analyst says a slowdown in property sales will be offset by growth in industries ranging from steel to cement

PUBLISHED : Monday, 08 January, 2018, 8:17pm
UPDATED : Monday, 08 January, 2018, 9:35pm

China’s stocks will probably extend a rally this year, as the ongoing cutbacks in overcapacity in traditional industries counter a decline in property sales and a pickup in the share prices of big companies is set to continue amid cheaper valuation, according to global investment bank UBS and local money manager China Universal Asset Management.

As property sales probably slow in the nation’s third- and fourth-tier cities this year because of government-imposed buying restrictions, profit growth in sectors such as coal, steel and cement that are needed for construction, is poised to continue as output curbs keep prices of industrial goods at relatively high levels, said Gao Ting, a strategist at the Swiss bank at a briefing in Shanghai on Monday.

Leading firms in their respective sectors will probably continue to outperform because of the valuation edge and positive earnings outlook, said Hu Xinwei, a fund manager at China Universal at a separate briefing on the same day.

“There will be no systemic risk arising from the slowdown in property sales because of the supply-side reform,” said UBS’s Gao, referring to the government-led cut in excessive capacity. “The steel, non-ferrous metal and coal industries won’t slow down as we saw in the past couple of rounds of property tightening.”

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Even as China’s property sales are projected to drop as much as 2 per cent this year, earnings growth at mainland-listed companies will probably increase 7.6 per cent and the nation’s economy is likely expand by 6.4 per cent, according to estimates by UBS.

There will be no systemic risk arising from the slowdown in property sales because of the supply-side reform
Gao Ting, strategist at UBS

China’s benchmark Shanghai Composite Index has risen in every trading session day so far this year, eking out a 3.1 per cent gain after climbing 6.6 per cent last year. Cyclical companies from cement to coal and steel are leading the charge on optimism that earnings growth will beat projections.

Anhui Conch Cement, the nation’s biggest maker of the building material, rallied 4 per cent on Monday, adding to a 16 per cent gain this year, after raising its 2017 earnings growth estimate to as much as 90 per cent from 70 per cent forecast in the third-quarter report.

China Universal’s Hu said he will closely watch these big and leading companies as they still trade at a discount to industry’s peers and earnings prospects are quite solid.

Hu’s fund has returned 52 per cent over the past year, beating 99 per cent of the peers, according to Howbuy, a research firm tracking China’s mutual fund industry. Shanghai-based China Universal has 305 billion yuan (US$47 billion) in assets under management.

The SSE 50 Index of the 50 biggest firms on the Shanghai exchange is almost 30 per cent cheaper than the Shanghai Composite on a valuation basis, according to the data from the bourse, even after the gauge surged 25 per cent in 2017.