Chinese traders are lamenting that the world-beating rally by the nation’s stocks this year may fizzle out because of the re-escalation of the trade war with the US. But there’s one possible benefit: good opportunities for dip buyers. HSBC Jintrust Fund Management and Hengsheng Asset Management say the recent flare-up of the China-US trade dispute has mostly been priced into stock prices and it is still possible that the world’s two largest economies will eventually strike a deal to resolve the current conflict, though the process could be bumpy. Analysts said they like Chinese sectors involved in finance, technology and new energy, as well as food and beverage, retail and agriculture. For example, liquor distillers like Kweichow Moutai and Wuliangye Yibin have held onto most of their gains this year, with stocks trading close to their record highs, while pig and chicken breeders like Muyuan Foods and Shandong Minhe Animal Husbandry may still rise on expectations about strained supply, analysts say. Bullish sentiment on Chinese stocks quickly faded this month as US President Donald Trump unexpectedly announced he would more than double the levies on US$200 billion worth of Chinese imports and threatened to include more items that are not covered by tariffs. The benchmark Shanghai Composite Index is now down 13 per cent from an April high, with US$1.2 trillion in market cap wiped off since then. It was a swift reversal of the bull momentum that had driven up the index by as much as 31 per cent this year. Nasdaq executive dismisses ‘discredited’ Steve Bannon’s call to bar Chinese companies from US capital markets “There’s no more room for further decline to run and there’s no systemic risk, unless the assumption is that there will be an all-out confrontation between China and the US beyond the trade front,” said Dai Ming, a Shanghai-based fund manager at Hengsheng Asset. “I am also cautiously optimistic that an agreement on trade will eventually be reached between the two nations. Therefore, this creates a buying opportunity both in the short and medium term.” Dai said most of his stocks holdings were concentrated in banks, whose below-book-value stock prices were cheap enough to resist the market turbulence, and he was shunning smaller companies whose businesses were heavily exposed to overseas sales, such as furniture makers and electronic firms. With the intensifying trade tension most likely will weigh on economic growth, hopes are rising again that the government will loosen policies to stave off a slowdown in the economy. Citic Securities, China’s biggest publicly traded brokerage, predicts the central bank will lower the amount of cash commercial lenders must set aside as reserves one more time this year, as the trade dispute may chip as many as 0.5 percentage points off China’s economic growth. Signs that the central bank is turning on the tap on liquidity have already surfaced, with the repo rates on the interbank market sinking to an almost four-year low this month. China’s economy grew by better-than-estimated 6.4 per cent in the first quarter before key April economic data all missed analysts’ projections. “On a whole, the fundamentals and liquidity of the A shares are better than in 2018 and earnings growth will probably trough in the second or the third quarter,” said Guo Min, a fund manager at HSBC Jintrust Fund Management in Shanghai, referring to the mainland-traded stocks. “Though there are instable external factors, we aren’t bearish on the markets. Should extremely low valuations occur, that’ll be a buying opportunity in the medium term. Shanghai to give tax incentives and funds to nurture home-grown chips industry as China enters next battlefront over technology Guo said she was bullish on finance, technology and new-energy stocks, based on her price-to-book and return-on-equity ratio models, without naming any specific names. Still, that is not to say that Chinese stocks will resume the bull run any time soon, as the trade war reins in the risk appetite and its fallout has yet to be fully assessed. Shenwan Hongyuan Group, a Shanghai-based brokerage, said investors now should stick to companies with high alpha, namely the stock whose share-price movements are more linked to company quality – such as food and beverage makers, retailers and agricultural firms – than swings on the broader market. High-beta companies, whose share-price gains are mostly derived from the positive sentiment on the broader market, should be avoided as they tend to underperform amid a restraint on risk appetite. Haitong Securities says the ongoing correction will not be coming to an end until the fundamentals improve again and a clear direction of the China-US trade talks emerges. “The market will most probably trade sideways going forward,” said Hengsheng Asset’s Dai. “There won’t be a significant comeback unless we see a solution to the trade issue.” Will the escalating US-China trade war and its catastrophic aftermath push the global economy into its next recession? A gauge of consumer-staples companies is still the best-performing sector so far this year, underscoring prevailing caution among investors who are seeking safe plays for their money and have doubts about the sustainability of this year’s rally on equities. The gauge has advanced 50 per cent, compared with a 14 per cent gain on the Shanghai Composite. “The trade war is presenting markets with a lot to digest,” said Carl Tannenbaum, chief economist at Northern Trust. “The sooner we can get a resolution, the clearer the outlook will be for the economy, and the more likely it will be that this nice 10-year financial expansion we have had since the financial crisis can continue.” China’s stock markets do not present much of a worry to policymakers for now, as they can always prop equities up, referring to constant intervention in stocks by the state-backed funds that are also known as the “national team,” he said. After the decline, the Shanghai Composite currently trades at 11 times estimated earnings, 15 per cent below its 10-year average, according to Bloomberg data. The multiple is also lower than that of 17 times for the S&P 500 Index and 13 times for Europe’s Stoxx 50 Index. “Looking from a three to five-year perspective, Chinese equities are currently one of the most appealing asset classes,” said HSBC Jintrust’s Guo. With additional reporting by Louise Moon.