Strategy of betting on Chinese value stocks may be losing its winning edge, says CICC

Betting on value stocks such as banks and property developers has been one of the most successful strategies this year, delivering a return of 27 per cent

CICC and Founder Securities say the momentum is unsustainable, and trading will be dominated by battered tech stocks once more

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Buying value stocks has been one of the most successful strategies for Chinese equities so far this year. But will it last? Photo: EPA-EFE

Published: 7:30am, 23 Aug 2021Updated: 7:30am, 23 Aug 2021

Investment banks from China International Capital Corp (CICC) to Founder Securities are becoming sceptical about value trades, one of the most successful strategies for Chinese stocks so far this year, questioning whether the ploy will work for the rest of 2021.

Bets on the likes of Bank of China, Country Garden Holdings and China Mobile have rewarded investors with an average return of 27 per cent in 2021, the second most successful tactic after chasing dividend names, according to Bloomberg data. Buying into growth stocks such as Tencent Holdings and Sino Biopharmaceutical, a successful trade that returned 15 per cent last year, has incurred an average loss of 21 per cent year-to-date, the data shows.

While the sector rotation has largely been fuelled by the dramatic changes in China’s regulatory landscape, the frenzy for value trades has prompted some caution from analysts who say the gains in share prices may have already overshot fundamentals.

“The run-up on value stocks is most probably a relief rally and the chance is low for a reversal,” said Liu Yang, an analyst at Founder Securities. “The banking and property industries are in the mature stage so the driver for earnings growth and its sustainability are very limited. The main trade may rotate back to tech growth stocks after a brief rebalance.”

Value stocks have been back in favour after Beijing’s regulatory crackdown on the fastest-growing industries from e-commerce to after-school learning has prompted traders to seek safe haven assets. Even after the rally, the banks and property developers on the Hang Seng Index are trading at a 40 per cent discount to book values on average, according to Bloomberg data.

Just a year ago, value trades were a redundant strategy among investors. Buying into value stocks incurred an annual loss of 31 per cent in 2020, when traders capitalised on the record amounts of credit unleashed by the central bank to combat the pandemic to boost their holdings of growth names that are more sensitive to liquidity.

An economic recovery from the damage of the pandemic this year has fuelled reflation bets, bolstering cyclicals such as banks and developers whose earnings strength is linked to economic swings. Chinese developers have got an additional boost thanks to optimism that a government rule capping the premium on land sales at 15 per cent will protect margins and after China Evergrande Group rolled out rescue plans to ease its cash crunch.

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