China Pacific Insurance says coronavirus-battered cyclical stocks are good bets due to growth potential

China Pacific Insurance is betting on beaten-down cyclical stocks traded in the mainland and Hong Kong markets, contending they have long-term growth potential as the mainland economy recovers from the coronavirus pandemic.

Finance and energy companies, whose shares were clobbered in the early period of the coronavirus pandemic, have turned out to be good picks, said Fu Fan, president of the mainland’s fourth-largest insurer.

Consumer stocks, such as liquor, clothing and daily necessities makers, are being closely watched by the company because they would become good buys if corrections were to set in.

“We have strengthened our research to find companies which turned out to be good buys after panic selling,” he told reporters on the sidelines of the Lujiazui Forum in Shanghai on Friday, without offering specific names. “The volatility created great opportunities for us to buy low.”

Energy and financial stocks are the worst-performing sectors on China’s CSI 300 Index this year, falling at least 13 per cent.

By comparison, the CSI 300 of large caps trading on the mainland is down 0.5 per cent in 2020.

The consumer sector has fared better, rising 1.9 per cent. The president said the insurer would increase holdings in solid firms, such as makers of liquor, clothing and daily necessities, after price dips.

China Pacific Insurance is finding a way to make lemonade out of lemons through its battered-stocks strategy, Fu explained, after the deadly coronavirus led the country’s economic output to fall 6.8 per cent in the first quarter of this year.

That was the first quarterly contraction since records began in 1992. Many frightened stock investors headed for the exits for fear of even deeper slides.

Now those hammered listed companies are in a position to grow, Fu said, as Beijing pins its hopes on stronger consumer spending to bolster its troubled economy. To do their part, local governments are encouraging manufacturers, retailers and online-shopping platforms to offer discounts to attract shoppers.

China’s retail sales in May dropped 2.8 per cent on year to 3.19 trillion yuan (US$450 billion). The year-on-year decline narrowed from 7.5 per cent recorded in April.

“Consumer companies which can recover sales quickly in the post-pandemic world are safe bets,” said Zhou Ling, a fund manager with Shanghai Shiva Investment. “The primary concern now is whether the virus will come back in the coming months.”

An outbreak in Covid-19 cases in Beijing last weekend sparked new worries in China about social activities, including travel and shopping. The second-wave of infections – which one Chinese disease expert said is now under control – came after China, through lockdowns, testing and other steps, brought the disease under control in April after its initial outbreak came to the world’s attention in January.

Shanghai-based China Pacific Insurance earned a footnote in stock market history in June, when it raised US$1.8 billion in June by floating 126 million global depositary receipts (GDRs) on the London Stock Exchange. It was only the second Chinese company to issue GDRs – shares of a domestic company that are additionally offered elsewhere in the world through bank certificates – on the one-year-old stock trading link between Shanghai and London.

Insurance funds like China Pacific are among major institutional investors on the A-share market.

They had 2.66 trillion yuan worth of equity holdings and investment in mutual funds by the end of April, according to Beijing-based newspaper China Times. Their assets in equities and mutual funds represented 12.1 per cent of their total. They are allowed to invest up to 30 per cent of their total assets.

Additional reporting by Zhang Shidong in Shanghai