Chinese stock pickers have been chasing this investment theme since the ‘trade war’ began

Chinese traders have been piling into shares of companies reliant on domestic consumptions over the past week since a rebound in Chinese equities started, offering a clue to what might be their favourites for the rest of the year.

Measures of health care and consumer-staples stocks have been the best-performing sectors among all 10 industry groups on the CSI 300 Index since the Chinese markets bottomed out after hitting a 28-month low on July 5. The two sub-indices have rallied at least 7.3 per cent since then, outperforming a 3.6 per cent gain on the benchmark Shanghai Composite Index.

While most mainland-traded stocks have been rebounding amid a reprieve of the intensifying trade spat between China and the US, companies including Guangzhou Baiyunshan Pharmaceutical Holdings and liquor distiller Wuliangye Yibin have won favour among investors, thanks to limited exposure to overseas sales and decent cash flow.

“On the backdrop of the trade war, the two sectors will be pretty good investment targets throughout the year because of their defensive nature,” said Wu Kan, a fund manager at Shanshan Finance in Shanghai. “These companies also often have pretty healthy cash flows on their balance sheets and that is also one of the key indicators of accounting health investors are closely looking at amid financial deleveraging.”

The Shanghai Composite remains down 14 per cent this year, making it the worst-performing stock benchmark among the world’s major markets, as investors flee equites amid concern of the frayed trade relation with the US and the crackdown on shadow banking will hurt economic growth. The Trump administration last week threatened US$200 billion worth of additional tariffs on Chinese imports, which will go into effect as early as the end of August.

While the gauge tracking pharmaceutical stocks has gained 8.9 per cent over the past week as the best-performing sector, followed by a 7.3 per cent gain on consumer companies, material and telecom stocks round out the top four. Telecom companies were buoyed by ZTE’s settlement with the US over the lifting of a sanction that banned the Chinese maker of telecommunication equipment from buying key US technology.

Money managers and brokerage analysts are in broad agreement that Chinese consumer stocks will continue to outperform.

UBS Group said companies exposed to domestic consumption top its recommendation list and HFT Investment Management, which manages US$7.5 billion in assets, said popular domestic brands were among quality assets.

Among the biggest gainers on the health care and consumer sectors Guangzhou Baiyunshan Pharmaceutical, Chongqing Zhifei Biological Products, Wuliangye and dairy maker Inner Mongolia Yili Industrial Group.

Guangzhou Baiyunshan Pharmaceutical has climbed 15 per cent over the past week and Tonghua Dongbao Pharmaceutical is up 13 per cent. Wuliangye and Yili have risen at least 8.4 per cent in the period.

“We are bullish on companies riding the wave of consumption and manufacturing upgrade,” said Gao Ting, a Shanghai-based strategist at UBS. “Leading players in the consumer staples and discretionary sectors remain our top picks.”