Global wealth manager Robeco and Citigroup views differ on strength of Chinese stocks in 2018

Global money manager Robeco is at odds with Citigroup over the strength of Chinese stocks next year.

While Robeco, with US$178.5 billion in assets under management, says mainland equities are likely to extend a rally in 2018 amid foreign capital inflows, Citigroup argues the A-share market will probably lose out to Hong Kong stocks for a third straight year because of increased regulatory scrutiny and the lack of high-quality listed firms.

Both the two firms are positive on the outlook of Hong Kong stocks.

According to Lu Jie, Robeco’s head of China research, foreign buying ahead of the inclusion of Chinese equities by global index compiler MSCI into its benchmarks in June next year will outweigh a liquidity squeeze triggered by deleveraging and escalating regulatory surveillance. So that will help the CSI 300 Index of big-cap companies to extend a 22 per cent gain clocked in 2017.

“Overseas investors are very positive on A shares as China’s economy stabilises, earnings estimates keep being revised up and valuations are fair,” he said at a briefing in Shanghai on Wednesday. “All these factors support constant inflows of foreign funds.”

The recent sell-off in Chinese equities, which sent the CSI 300 down by 4.2 per cent from this year’s high set last month, is a one-off seasonal factor, as mutual fund managers rush to lock in profits from the year’s best-performing stocks to compete for annual rankings, Lu said.

Meanwhile, Oscar Choi, head of China research at Citigroup, said that increased crackdown on misdeeds in the financial markets will weigh on sentiment on mainland stocks and prompt investors to switch more of the allocations to Hong Kong equities through the Stock Connect.

“A shares have a totally different setting of game rules,” he said at a briefing in Hong Kong, also on Wednesday. “Now that the playbook of the A-share market has changed under the changing regulatory environment, some of the investors would prefer going to Hong Kong or overseas markets.”

Choi earned his fame by recommending buying the Hong Kong-listed stocks of developer China Evergrande Group, whose shares have jumped more than more than five fold this year.

The Hang Seng Index has advanced 33 per cent this year, the best performer among the world’s major equity markets. Chinese technology juggernaut Tencent Holdings has contributed to 28 per cent of the annual gain on the benchmark, according to data compiled by Bloomberg. Its shares have more than doubled in 2017.

The absence of the likes of Tencent and other quality companies that generate high dividend yields in the mainland stock market is another reason for Choi to be more bullish on Hong Kong stocks next year.

“So, Hong Kong listed shares will easily outperform those listed on the mainland,” he said, recommending companies in leisure, entertainment, health care and insurance.