20 January 2019
Chinese banks and insurers remain attractive even in an economic slowdown. Photo: Bloomberg
Chinese banks and insurers remain attractive even in an economic slowdown. Photo: Bloomberg

Banks, insurers most attractive amid monetary easing

Many central banks joined Japan and Europe in launching monetary easing at the beginning of 2014.

Since then, Canada, Australia, Sweden, Russia and India have cut interest rates.

On Feb. 5, China’s central bank reduced the reserve requirement ratio (RRR) for commercial lenders by 50 basis points after slashing interest rates in November.

It was the first RRR cut in three years and authorities said they will keep a prudent monetary policy, maintain appropriate liquidity and guide monetary credit and social financing at a proper pace to ensure steady and healthy economic growth.

The investment outlook for A shares has not changed dramatically after the RRR cut.

Investors should put their money in defensive stocks (such as healthcare) and cyclical plays (finance) to take advantage of the volatile market.

Among cyclical stocks, finance and property plays could benefit the most from monetary easing.

Some mainland property companies have been affected by recent political developments but investors should not worry too much about political risk which happens in any industry or company.

At present, the property sector has a single-digit price-to-earnings (P/E) ratio while earnings growth remains stable and there’s little likelihood of a more adverse policy.

These fundamentals make the sector attractive. Property companies heavily rely on sales growth, which means the RRR and interest rate cuts will bolster housing demand in the medium to long term.

The market has been cautious in projecting future earnings growth for property companies.

Mainland property developers could beat market expectations in the second half, with first-tier players looking more attractive because of their earnings prospects, debt management, brand and execution capabilities.

Meanwhile, the insurance sector will benefit from improving market sentiment and financial innovation while banks will encounter more challenges.

Nevertheless, bank valuations could improve if ongoing reform in the sector remains on track.

Consumption-related counters were the worst performer among A shares last year, prompting investors to lower their projections.

However, consumption plays could provide a pleasant surprise this year if economic growth gains traction.

For example, some dairy stocks have rebounded recently after being battered last year.

It remains to be seen whether the recovery is sustainable. Investors should pay close attention to these interesting trends.

This article appeared in the Hong Kong Economic Journal on Feb. 25  

Translation by Julie Zhu

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Managing director of retail division at Value Partner

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