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Top Fund Manager: No 2nd-Half Rally for China Stocks

Tuesday, 26 June 2012 06:32 PM

China’s economy will probably stay in the “doldrums” in coming months, preventing a second-half rally for the nation’s equities, according to the country’s best-performing fund manager.

The government will do just enough to prevent the world’s second-biggest economy from slowing further instead of taking more aggressive measures to boost growth, Yu Guang of Invesco Great Wall Fund Management Co. in Shenzhen, said in an e-mailed interview on June 21. Property, auto and household-appliance stocks may outperform even as the overall market stalls, said Yu, whose Core Competitiveness Fund has returned 25 percent this year, ranking it first among 714 China-based mutual funds, according to data compiled by Bloomberg as of June 25.

China’s economy grew 8.1 percent in the first quarter, the slowest pace in almost three years, as slowing global growth dragged on the nation’s exports. The Shanghai Composite Index has fallen 6.3 percent in June, poised to be Asia’s worst- performing benchmark index for the month, as a manufacturing slump and concern Europe’s debt crisis is curbing exports overshadowed the first cut in interest rates since 2008. The tumble in stocks pared the Shanghai gauge’s gain in 2012 to 1 percent.

“Stocks will be range-bound in the second half of the year,” Yu said, declining to give equity-index forecasts or name any stock picks. “China’s economy will remain in the doldrums for a while, in line with the trend of the global economy. It’s difficult to see either a big decline or a big rally.”

Higher Valuation

The Shanghai Composite, which tumbled a combined 33 percent in 2010 and 2011, trades for 9.68 times estimated profit, data compiled by Bloomberg show. The MSCI BRIC Index, which includes India, Russia and Brazil, is valued at 8.3 times profit.

China’s Premier Wen Jiabao announced on March 5 an economic growth target of 7.5 percent for this year, down from an 8 percent goal in place since 2005. The 2012 objective is still more than double the 3.5 percent pace projected for the global economy by the International Monetary Fund.

While the government will further lower borrowing costs and lenders’ reserve-requirement ratios this year, as well as boost infrastructure spending, the measures will be gradual and limited, Yu said. China has reduced banks’ reserve ratios three times since November to spur lending to cash-strapped small companies. The central bank cut its one-year lending and deposit rates by a quarter percentage point on June 8.

“The rate cut is simply the start and the government is expected to take additional measures such as fiscal policies to counter a slowdown in the economy,” said Yu. “But these measures will be limited.”

Slowing Growth

Yu’s outlook for stocks is in contrast with other top- performing Chinese money managers and strategists. Wang Qi, a fund manager at Beijing-based Yinhua Fund Management Co., said in a May 25 interview that stocks will rally in the second half on the government’s pro-growth policies. Beijing Gao Hua Securities Co., the most accurate brokerage based on Bloomberg Rankings, forecast the Shanghai index will rise to 2,750 by year-end. The gauge settled yesterday at 2,222.07.

China’s economy has been decelerating since 2010 as rising consumer and property prices prompted the government to raise borrowing costs, increase down payment ratios for home buyers and restrict the number of house purchases. Concern that Greece may exit the euro has prolonged Europe’s debt crisis and hurt the outlook for China’s exports to its biggest trading partner.

Not Quick Enough

Growth may be below 7 percent in the second quarter if this month’s data doesn’t improve, the People’s Daily reported on June 13. Manufacturing may shrink for an eighth month in June, matching the streak during the global financial crisis, a preliminary reading of a purchasing managers index from HSBC Holdings Plc and Markit Economics showed on June 21.

China hasn’t been quick enough in responding to the slowdown in the economy, Qu Hongbin, a Hong Kong-based chief China economist for HSBC Holdings Plc, said in a Bloomberg Television interview on June 21. The government’s policy response has been late, with June data expected to show “deterioration in most growth-sensitive indicators,” Jason Todd, Hong Kong-based global head of equity strategy at Religare Capital, wrote in a report yesterday.

China won’t introduce large-scale economic stimulus similar to the 4 trillion ($629 billion) package announced during the global financial crisis in November 2008, Fan Jianping, chief economist at the government-run State Information Center, said at a conference on June 7. The economy is still dealing with the negative effects from that stimulus, he said. Inflation jumped to a three-year high of 6.5 percent in July 2011 before easing to 3 percent last month.

Top Holdings

Invesco Great Wall Fund Management, a venture with Invesco Ltd., a New York-listed asset management company, had 38.9 billion yuan in assets at the end of the first quarter, according to Shanghai-based fund tracker Howbuy. Yu, who joined Invesco Great Wall Fund in 2005, has also worked as an analyst for Century Securities Co. and as a manager in the risk management department at BOC International Ltd.

Yu’s top three holdings at the end of the first quarter were Gree Electric Appliances Inc., China’s largest maker of home air-conditioners, Industrial Bank Co. and Shenzhen Hongtao Decoration Co., according to his fund’s quarterly report. Gree has gained 23 percent this year, while Industrial Bank rose 2.3 percent and Hongtao jumped 50 percent.

A gauge of property stocks in the Shanghai Composite Index, the best performer of five industry groups this year with a 21 percent advance, may extend its rally in the second half on policy-easing measures, Yu said.

Automakers and household appliance stocks will gain on “low valuations and stable earnings growth,” Yu said. A gauge of consumer discretionary companies in the CSI 300 Index that includes Gree trades at 11.5 times estimated earnings, compared with its five-year average of 21.6 times, data compiled by Bloomberg show.

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Tuesday, 26 June 2012 06:32 PM
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