24 October 2016
Red-chip plays like Tianjin Port Development Holdings are likely to get capital injection. Photo: Bloomberg
Red-chip plays like Tianjin Port Development Holdings are likely to get capital injection. Photo: Bloomberg

SOE reform to trigger more investment opportunities

Beijing has laid the groundwork for a local bull market, but it remains unclear whether the mainland and Hong Kong markets will be able to lure foreign funds. 

That depends on whether foreign fund managers have the resolve to tap into the A-share market with 1.1 trillion yuan (US$177.3 billion) just as the brave Pilgrims embarked on the voyage aboard the Mayflower ship in 1620.

It’s just an issue of when A shares will be included in the MSCI indexes. In a 10-year cycle, it’s a good time to collect some Hong Kong and Chinese shares over the past two or three years and embrace the bull market cycle extending to 2017.  

Any correction will be a perfect time for buying. Currently, H shares are becoming a battlefield for mainland retail investors and foreign institutional investors. Second and third-tier stocks are the main targets.

I’ve suggested that investors take profit from some heavyweight stocks and deploy the capital into some third and fourth-tier stocks for short-term speculation. It’s time to take profit when these stocks reach the high level for these stocks. Most of the hot money in Hong Kong comes from mainland individual investors, and local individual investors are just following the trend.

If investors are confident of an across-the-board market rally, all sectors and individual stocks could become a market focus, as we’ve seen last month. Investors should ramp up their investment in preparation for the uptrend.

I’ve suggested that investors lift their portfolio in the equity market from 30 percent to all-in in early April in order to capture the uptrend. Investors should try their best to capture the two to three rallies each year, and they should be patient to wait for another rally after taking profit and holding cash.

They should pay attention to stocks that will benefit from monetary easing. Market sentiment for debt-laden mainland property and paper plays has improved recently. Beijing has released various measures to stabilize the housing market, and mainland property sales have rebounded.

A number of mainland property stocks have hit multi-year highs recently. However, investors have to watch out for a possible bubble in these lagging sectors. Mainland banking stocks should be very attractive as the Chinese central bank is likely to further cut the reserve requirement ratio to 16 percent.

Nevertheless, it’s quite difficult to pick the timing for execution. A rule of thumb is to collect these stocks amid correction and take profit with good news.

Ping An Insurance Group Co. of China (02318.HK), power and airline stocks that benefit from lower oil and coal prices, healthcare and certain automobile stocks are performing quite well. Brokerage stocks are also big beneficiaries of the red-hot stock market.

The consolidation of central state-owned enterprises (SOEs) has been going on for the past three years, and the number of central SOEs has been reduced to 112 from 144. However, the majority of these central SOEs are in monopolistic industries, and an industrial reshuffle could be very complex.

Central SOEs in the grains, airline, shipping and chemical sectors would have more potential for consolidation. Investors could also use local government red-chip stocks as proxies.

China Resources and CITIC Group have been stepping up efforts to streamline their business units.

As Beijing pushes the establishment of more free trade zones and grants more power to local governments, red-chip stocks will have greater chances of getting capital injection. Investors should look at stocks like Tianjin Development Holdings (00882.HK), Tianjin Port Development Holdings (03382.HK), Shanghai Industrial Holdings (00363.HK), Xiamen International Port (03378.HK), China Foods (00506.HK) and China Agri-Industries Holdings (00606.HK).

Although it’s difficult to determine the best time to buy, investors should look for market corrections to beef up their portfolios.

This article appeared in the Hong Kong Economic Journal on May 5.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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