Shanghai’s main stock index could hit the 3,500-points mark within the first quarter of 2015 as the Chinese central bank has joined global peers in injecting more liquidity into the system, helping offset some jitters arising from painful economic reform.
The first three months of 2015 could be a critical period for dual-listed shares or the so-called A-H shares to become main targets for global investors. If the stocks do indeed lure overseas funds, the state-owned enterprises index could outperform A share and H share benchmarks.
Government-owned financial plays and state-owned enterprises with exposure to government policy will lead the charge.
In fact, a number of mainland financial stocks have already posted sharp rallies recently, helping drive capital into the H shares of such firms. Thus, an entity such as China Merchants Bank (03968.HK) is already at a premium in Hong Kong over its mainland-listed A shares, while the discount in the valuation gap of Bank of Communications (03328.HK) has narrowed to 10 percent.
Mainland insurance, highway, cement and healthcare plays also have seen narrowing price gaps or even a premium.
Therefore, investors should focus on infrastructure, power, oil and mainland property stocks to take profit from the price gap.
Meanwhile, medium and long-term investors should bet on mainland banks, which are more familiar to global funds. Moreover, their P/E ratio is around 5 to 6 times, while dividend payout ratio is around 4 to 5 percent. These plays have strong fundamentals after foreign investors have flagged fears about China’s financial risk and economic hard-landing for years.
Also, leading mainland brokerages are attractive. Citic Securities (06033.HK) and Haitong Securities (06837.HK) both have undertaken new share placement to replenish capital. Mainland insurance plays have also performed in line with the overall market. And infrastructure stocks are set to benefit from Beijing’s policy to absorb excess capacity and have a bigger say in the region.
As for mainland property stocks, they may stabilize following the central bank’s rate cut. Real-estate has been one of the pillars underpinning China’s economy for years. Property developers have found some relief as social capital has gradually been channeled into the stock market. And Beijing has already removed some curbs on the sector, which is set to benefit leading plays.
China’s property sector is undergoing a broad shake-up. That will lead to disappearance of large number of smaller players, a phenomenon which happened in 1970-1980s in Hong Kong. The big players, particularly the listed firms, will become winners. The list includes entities such as Poly Property Group (00119.HK), Yuexiu Property (00123.HK), CRH (Land) Ltd (01109.HK), Shimao Property Holdings Ltd. (00813.HK), China Vanke (02202.HK), and Country Garden (02007.HK).
In addition, investors should add some sportswear plays at attractive valuations. The government has outlined a 5 trillion yuan sports market goal through 2025. Anta Sports (02020.HK), Peak Sport (01968.HK), Xtep International Holdings (01368.HK) and 361 Degrees (01361.HK) are some names worth watching.
This article appeared in the Hong Kong economic journal on Dec. 30
Translation by Julie Zhu
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