Bloomberg News

Cheapest Stocks in 6 Years Lure Funds: China Overnight

April 10, 2012

The lowest Chinese stock valuations since 2005 are a buy signal to the biggest emerging-market money managers, who say the economy will avoid a hard landing as the government bolsters growth.

The MSCI China Index of shares available to foreign investors fell the most among global equity indexes last month, dragging it to nine times estimated profit, a 23 percent discount to the MSCI All-Country World Index (MXWD), data compiled by Bloomberg and MSCI Inc. show. The last time the gap was this big, in December 2005, the China index beat the global gauge by about 60 percentage points in 12 months.

Chinese shares will rally after the strongest manufacturing reading in 12 months on April 1 showed that the economy is weathering a slowdown in exports, according to Allianz Global Investors. The government may boost spending and loosen monetary policy to keep growth above its 7.5 percent target, said Schroders Plc, which oversees about $291 billion.

Hong Kong markets opened today after being shut for holidays since April 5. The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese stocks in New York lost 1.1 percent since then, while the Shanghai Composite Index (SHCOMP) of mainland Chinese stocks sank 0.7 percent through yesterday.

“We’re reaching levels in Chinese equities which are clearly becoming quite attractive,” Bart Turtelboom, the London-based co-head of emerging markets at GLG Partners, which oversees about $26 billion, said in a March 28 interview. “We have been increasing our positions.”

Trade Data

The Bloomberg China-US gauge, comprised of 55 U.S.-listed companies operating in the world’s second-biggest economy, lost 1.1 percent to 101.96 yesterday in New York, while the Shanghai Composite lost 0.9 percent. The declines followed data showing Chinese inflation quickened last month to 3.6 percent, more than the median economist forecast for 3.4 percent, which damped speculation the central bank will ease monetary policy.

The MSCI China Index (MXCN), comprised almost entirely of Chinese companies listed in Hong Kong, slumped 1.2 percent as trade data today fueled concerns over China’s economy. Imports increased 5.3 percent, the customs bureau said, below the 9 percent median estimate in a Bloomberg News survey.

The MSCI China tumbled 6.8 percent last month, the most among 70 national equity gauges tracked by MSCI and Bloomberg, as the government cut its growth target from the 8 percent goal in place since 2005 and reported exports that trailed estimates. The announcements revived concern among some investors that an economic slowdown will curb profits.

‘Hard Landing’

“A lot of investors I talk to, especially in the U.S. and Europe, they are very concerned about a China hard landing,” Raymond Chan, chief investment officer for the Asia Pacific region at RCM, a unit of Allianz Global that oversees about $138 billion, said in an April 2 interview on Bloomberg Television. “We believe China has a lot of policy tools they can use to avoid a hard landing.”

The Shanghai Composite climbed 0.9 percent today as speculation grew the government will take steps to bolster growth. Premier Wen Jiabao, who is trying to reduce China’s reliance on exports and shift to a more sustainable growth model based on domestic consumption, said on April 3 that the government plans to announce “fine-tuning” measures to bolster the economy soon, according to China National Radio.

Policy makers will cut banks’ reserve requirements at least three more times in 2012 following a 0.5 percentage-point reduction to 20.5 percent in February, Geoffrey Dennis, Citigroup Inc.’s global emerging-market strategist in New York, wrote in an April 3 report. China is “almost guaranteed” to cut benchmark interest rates or reserve ratios this month, Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole SA, said in Bloomberg TV interview on April 4.

Government Spending

China’s economy will probably grow 8.4 percent this year as the government increases spending by as much as 1.5 percent of gross domestic product, Citigroup’s Dennis wrote. He recommends owning more Chinese shares than are represented in benchmark indexes.

Trina Solar Ltd. (TSL:US) led solar-panel makers lower in U.S. trading, tumbling 7.3 percent to $6.11, the lowest level since Oct. 7. LDK Solar Co. (LDK:US) sank 2.4 percent to a more than four-month low of $3.30 after Chinese newspapers said the company is planning to fire and reassign workers. Yingli Green Energy Holding Co. (YGE:US) dropped 5.5 percent to $3.25, the weakest level since Oct. 3.

LDK, based in Xinyu of China’s Jiangxi province, is making personnel changes involving several teams in its wafer department, the National Business Daily said in a report dated April 10 on its website, citing LDK’s public relations division. The adjustments are “intended to control costs and increase efficiency,” the Shanghai-based newspaper reported, citing e- mails on April 9 from LDK’s spokesman Li Longji.

‘Fundamental Problems’

“The broader fundamental problems for the industry are still very much there, about 40 gigawatts of solar wafer capacity versus 25 gigawatts of demand,” said Aaron Chew, a New York-based solar analyst at Maxim Group LLC, referring to global solar energy supply and demand. Chew gives Trina a sell rating. “Most of these manufacturers will be suffering from a similar type of environment for another three quarters.”

China’s Purchasing Managers’ Index rose to a one-year high of 53.1 in March, the country’s logistics federation and the National Bureau of Statistics said on April 1. While a separate PMI reading of 48.3 announced the same day by HSBC Holdings Plc and Markit Economics showed a contraction in manufacturing, the figures signaled that economic growth is “slow, but remains resilient,” Credit Suisse Group AG (CSGN) economists wrote in an April 2 report.

Political Stability

The government has room to stimulate the economy after China’s inflation rate fell to a 20-month low of 3.2 percent in February, according to Allan Conway, who oversees about $24 billion as the head of emerging market equities at Schroders in London. While data yesterday showed inflation rebounded to 3.6 percent in March, that’s still 2.9 percentage points lower than a three-year high of 6.5 percent reached in July 2011.

The ruling Communist Party’s desire for political stability during its once-in-a-decade leadership transition later this year also increases the odds that policy makers will take steps to boost growth, Conway said. Wen and President Hu Jintao will step down from their roles to make way for a younger generation, probably including Vice Premier Li Keqiang and Vice President Xi Jinping.

“China looks extremely attractive,” Conway, who holds more shares in the country than are represented in benchmark indexes, said in a March 29 phone interview. “The supreme concern in China is political stability. It’s very well understood that the best way of achieving that political stability is ongoing economic prosperity.”

Analyst Estimates

Conway’s Schroder International Selection Fund - Global Emerging Market Opportunities (SCGMOAA) has topped 85 percent of peers in the past five years, according to data compiled by Bloomberg.

Chinese companies have failed to meet analysts’ earnings projections for the past two quarters as the economy slowed. Quarterly net income reported by MSCI China companies since Jan. 9 trailed forecasts by 9.6 percent, following an average shortfall of 3.9 percent in the previous three months, according to data compiled by Bloomberg.

Agricultural Bank of China Ltd., the nation’s third-biggest lender by market value, posted its first drop in quarterly earnings since listing two years ago on March 22. The Beijing- based company’s 21.2 billion yuan ($3.4 billion) profit in the fourth quarter was 14 percent lower than a year earlier and trailed the average analyst estimate by 26 percent, data compiled by Bloomberg show.

Disappointing Earnings

“We’ve reduced our net exposure in China,” Emmanuel Hauptmann, a senior equities fund manager at Geneva-based Reyl Asset Management, which manages about $1.8 billion, said in a March 30 phone interview. “We note a weakness within Chinese companies and a marked flattening of growth.”

Stock valuations have already discounted the potential for disappointing profits in China, Winson Fong, who helps oversee about $21 billion as a money manager at Lion Global Investors in Singapore, wrote in an April 3 e-mail. Beijing-based China Construction Bank Corp. (939) and Cnooc Ltd. (883), China’s largest offshore energy producer, accounted for about 9.5 percent of the firm’s LionGlobal China Growth Fund, according to a March fact sheet.

The MSCI China index’s 23 percent discount to the MSCI All- Country gauge is more than three times bigger than the average gap of 7 percent since 2003, according to data compiled by MSCI and Bloomberg. The China measure’s estimated price-earnings ratio of nine compares with a historical mean multiple of 12.5, the data show. The MSCI BRIC Index (MXBRIC) of stocks of Brazil, Russia, India and China traded for 8.7 times projected profits at the end of March.

Lower Valuations

Dongfeng Motor Group Co. (489), the Chinese partner of Nissan Motor Co. and Honda Motor Co., is a holding in Citigroup’s “model portfolio” for global emerging markets, Dennis wrote in his April 3 report. Wuhan, China-based Dongfeng is valued at 8.4 times analysts’ estimates for 2012 profit, a 24 percent discount to the median multiple for global peers, according to data compiled by Bloomberg. The stock, which fell 7.9 percent in Hong Kong trading last month, is up 5.1 percent this year.

Anhui Conch Cement Co. (914), another Citigroup recommendation, trades for 10.6 times estimated profits, data compiled by Bloomberg show. Shares of the Anhui, China-based cement maker are up 13 percent this year, following an 8.9 percent drop last month.

“At this level, the market is already pricing in the expectation of a challenging environment,” said Lion Global’s Fong. “There are a number of attractive investment opportunities beginning to emerge.”

To contact the reporters on this story: Michael Patterson in London at mpatterson10@bloomberg.net; Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Emma O’Brien at eobrien6@bloomberg.net


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Companies Mentioned

  • TSL
    (Trina Solar Ltd)
    • $11.25 USD
    • -0.06
    • -0.53%
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