Chinese small and mid-size stocks are attractive as monetary authorities may cut interest rates once or twice more this year, said David Semple, who oversees $35 billion in assets at Van Eck Associates Corp.
Semple, whose Van Eck Emerging Markets Fund has beaten 95 percent of its peers in 2012, said he likes China Minsheng Banking Corp. (1988), Greatview Aseptic Packaging Co., Stella International Holdings Ltd. (1836) and Sitoy Group Holdings Ltd. (1023) The fund has returned 7.6 percent this year, compared with a 1 percent loss for the MSCI Emerging Markets Index. (MXEF)
“Larger Chinese companies are fully valued whereas small and mid-caps have outperformed this year, which is where we’ve found our sweet spot,” Semple, Van Eck’s director for international equity, said in an interview at Bloomberg’s office in New York on June 8. “If you want solid domestic demand with growth at a reasonable price, then you end up going down the cap curve.”
Chinese stocks traded in New York rose for the first time in six weeks after the People’s Bank of China on June 7 reduced benchmark interest rates for the first time since 2008 to bolster growth in the world’s second-largest economy. The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese companies in the U.S. advanced 3.5 percent last week, snapping a five-week slump that sent the gauge to an eight-month low on June 4. The index dipped 0.4 percent to 90.27 on June 8.
Data this past weekend showed China’s consumer prices rose the least in two years in May and industrial output and retail sales trailed estimates, adding pressure for more stimulus.
Dangdang, Huaneng Jump
E-Commerce China Dangdang Inc. (DANG:US), the country’s biggest Internet book seller also known as Dangdang, gained the most among companies in the Bloomberg gauge last week. Its 21 percent surge was the biggest weekly advance since Jan. 20. Huaneng Power International Inc. (902) surged 13 percent in the week, the most since November 2008, as falling power-station coal prices in China help cut costs at the nation’s largest electricity producer.
The iShares FTSE China 25 Index Fund (FXI:US), the biggest U.S.- listed China exchange-traded fund, retreated 2.8 percent to $32.81 on June 8, trimming its gain last week to 0.4 percent.
The Bloomberg-China measure traded at 17 times estimated profit, after reaching 16.2 on June 4, the lowest level since March 2009. The Hang Seng China Enterprises Index (HSCEI) of Chinese companies traded in Hong Kong has slid 5.9 percent this year, sending average valuations of the gauge to 7.3 times estimated earnings, the lowest level since October 2011, and below the 9.8 average multiple for companies in the MSCI Emerging Market Index.
More Rate Cuts
Policy makers will cut interest rates once or “maybe” twice more this year and further lower bank reserve requirements, Semple said.
“They’re much less worried about inflation as there doesn’t look to be too many pressures in the system right now,” he said.
The central bank also gave lenders additional leeway to set the amounts they pay on deposits and charge for loans, according to its June 7 statement. The rate cut follows three reductions to bank reserve-requirement ratios since November.
Inflation slowed to 3 percent in May from 3.4 percent in April and from 5.5 percent in May 2011, the government reported June 9. Production increased 9.6 percent, lower than a projected 9.8 percent gain, and retail sales climbed 13.8 percent. May trade data released yesterday showed exports and import growth topped estimates.
Policy makers will take further easing steps in the third quarter, Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, said in an interview with Bloomberg Television on June 8.
The broader Hang Seng Index (SHCOMP) has added 0.4 percent this year while the Shanghai Composite Index of mainland stocks is up 3.7 percent for the year, following a 22 percent slump in 2011.
China’s stocks are set to climb 36 percent over the next year as valuations drop below their decade average and the government further loosens monetary policy, according to Credit Suisse Group AG. The Shanghai stock measure is likely to rise to 3,100 by the end of June 2013, Vincent Chan, head of China research at Switzerland’s second-largest bank, said in an interview at a June 7 conference in Hangzhou, China.
American depositary receipts of Beijing-based Dangdang rose to a two-week high of $5.50 on June 8 after a three-day rally. A five-day advance in Huaneng’s ADRs sent them to the highest level in seven months. The ADRs, each representing 40 underlying shares in the company, traded 0.5 percent below (HNP:US) its Hong Kong stock on June 8, from a 0.6 percent premium in the previous day.
21Vianet Group Inc. (VNET:US), an Internet data center service provider based in Beijing, slid 9.2 percent last week to a five- month low of $9.99. Hollysys Automation Technologies Ltd. (HOLI:US), an automation system manufacturer, lost 8 percent for the week to $8, the lowest level this year.
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