Newsflash
| Worst BRIC China Becomes Fisher’s Best Buy on Consumer Rebound |
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China’s stocks, the worst performers among the largest emerging markets in the third quarter, are poised to rebound as investors say shares are too cheap to pass up with economic growth accelerating. “They are the best value equity play anywhere in the world,” said Robert Froehlich, senior managing director at Hartford Financial Services Group, which oversees $352 billion. “Valuations and the Chinese consumer are a one-two punch.” Markets in China open today after an eight-day holiday. The benchmark Shanghai Composite Index lost 6.1 percent in three months amid concern that a lending slowdown would stifle the world’s third-largest economy. Stock gauges in Brazil, Russia and India -- the three other so-called BRIC nations -- each gained at least 18 percent in the same period, the first time since the end of 2007 that they’ve risen as Chinese shares fell. Equities in the Shanghai index trade at 30.75 times its companies’ reported profit, down from this year’s peak of 39 and the smallest premium in a year versus the MSCI EM Index of developing countries, whose shares trade at 20.6 times earnings, data compiled by Bloomberg show. China’s benchmark gauge will gain as much as 32 percent in the fourth quarter, according to the average of estimates by China Galaxy Securities Co., GF Securities Co. and Shenyin & Wanguo Securities Co., three of China’s six biggest brokerages. Bullish on China “China is where we are putting most of our money out of the BRICs,” Peter Schiff, president and chief global strategist for Darien, Connecticut-based Euro Pacific Capital, whose clients have more than $2 billion in assets, said in a telephone interview. “Valuations are certainly better there. That is where the growth and profits are going to be.” Schiff, who predicted the U.S. recession in 2006, said he is recommending “domestic-demand plays” such as Dah Chong Hong Holdings Ltd., which owns car dealerships and food and consumer products outlets, and Xtep International Holdings Ltd., a sporting goods retailer. Both companies trade in Hong Kong. Most global funds trade in Chinese shares through Hong Kong-listed stocks, American depositary receipts and exchange traded funds because of investment restrictions on the mainland. The Hang Seng China Enterprise Index of Hong Kong-listed Chinese shares has risen 3.9 percent through Oct. 7 since China shut its markets for the National Day holidays. The Bank of New York Mellon China ADR Index, which tracks American depositary receipts for Chinese companies, has gained 2.1 percent. Brazil’s Bovespa index has added 1.8 percent and Russia’s Micex advanced 2.4 percent this month, extending their third- quarter rallies. India’s benchmark Sensitive Index, or Sensex, has slipped 1.9 percent during that time. Economic Growth China’s gross domestic product expanded 7.9 percent in the second quarter, rebounding from the slowest growth in almost a decade as a $586 billion government stimulus package and record new loans of $1.1 trillion boosted industrial production and retail sales. The economy will grow 8.7 percent in the third quarter, 9.9 percent in the fourth and 9.5 percent in 2010, according to median forecasts in Bloomberg surveys. Among the BRICs, “China is the best because of the growth in the economy,” said Mark Mobius, who oversees about $25 billion as Singapore-based executive chairman at Templeton Asset Management Ltd., in an interview. “I think there will be a lot of surprises next year in terms of recovery.” Speculation the economy would rebound helped drive the Shanghai index up 63 percent in the first half, making it the second-best performer among 88 measures tracked by Bloomberg. The rally ended as banks slashed lending to avert stock and property bubbles. Bear Market The Shanghai index plunged 22 percent in August, entering a bear market. The gauge is down 20 percent from its 15-month high on Aug. 4, making it the world’s fourth-worst performer in the third quarter. New loans declined in July to less than a quarter of June’s level. China Construction Bank Corp., the nation’s second largest, said in August it will cut new lending by 70 percent in the second half to avoid a jump in bad debt. Chairman Guo Shuqing said excess cash in the banking system has led to asset bubbles. The resumption of initial public offerings in June after a nine-month halt also triggered concern that demand would be diverted from existing equities. China State Construction Engineering Corp., the country’s largest homebuilder, received 1.85 trillion yuan ($242 billion) of bids for its July IPO, then the world’s largest in 16 months. “Sentiment is fragile, and if we see another big IPO, confidence could be badly affected,” said Larry Wan, the Shanghai-based deputy chief investment officer at KBC-Goldstate Fund Management Co., which oversees about $583 million. ‘Bumpy Road’ Shanghai and Shenzhen offerings have raised a total 96.38 billion yuan this year, Bloomberg data show. The companies gained an average 57 percent on their first day of trading, compared with a 152 percent increase last year. “We’re not as enthusiastic in the immediate term about China as other BRIC markets,” said Uri Landesman, who oversees $2.5 billion at ING Investment Management Inc. in New York. “It’s a question where they can keep stimulating domestic demand, and it may be a bumpy road a while. Lending is very definitely an issue.” Even after the quarterly slump, stocks in China remain more expensive than the other BRICs, a term coined in 2001 by New York-based Goldman Sachs Group Inc. Chief Economist Jim O’Neill. China’s multiple of 30.75 compares with 21.7 for Brazil’s Bovespa index trade, 20.9 for India’s Sensex and 13.1 for Russia’s Micex. Shares in the Hong Kong China Enterprise Index trade at a ratio of 20.7. Stocks ‘Inexpensive’ At the same time, the valuation for China’s benchmark stock index relative to Brazil’s fell last month to the lowest level since May, weekly data compiled by Bloomberg show. The Shanghai index also trades at the smallest premium over the Sensex in about 10 months and over the Micex in a year. “There is no doubt that Chinese shares are statistically inexpensive, even though that doesn’t mean they will go up,” said Kenneth Fisher, who manages $28 billion as chief executive officer of Fisher Investments Inc. in Woodside, California. “In the fourth quarter, I think they’ll do just fine.” Earnings will recover along with the economy, according to Shenyin & Wanguo Securities. Corporate profits will expand 17.9 percent in the third quarter from a year earlier, and nearly triple in the fourth quarter, the Shanghai-based brokerage said in a Sept. 28 report, citing estimates for companies it monitors. ‘Not Yet Solid’ Premier Wen Jiabao has signaled he will maintain unprecedented government spending to ensure the recovery. The rebound is “unstable, unbalanced and not yet solid,” Wen said Sept. 11 in a speech at the World Economic Forum in Dalian, a city in northwestern China. “We cannot and will not change the direction of our policies when the conditions aren’t appropriate.” The central bank said Sept. 29 it will stick to a “moderately loose” monetary policy and guide reasonable loan growth. “In the fourth quarter, I expect mainland markets to play catch up with the rest of BRIC countries as worries about credit growth subside,” said Jing Ulrich, JPMorgan Chase & Co.’s chairwoman for China equities and commodities in Hong Kong, in a phone interview. Credit Expansion New lending climbed in August to 410.4 billion yuan from 355.9 billion yuan in July, the government said. Credit expansion may have risen to more than 600 billion yuan September, National Business Daily reported Sept. 29, citing estimates made by the Agricultural Bank of China. Shenyin & Wanguo said it estimates the Shanghai Composite will rise as much 22 percent in the fourth quarter, compared with estimated gains of as much as 30 percent at GF Securities and 44 percent at Galaxy. “We see the Shanghai Composite setting a new high for the year in the fourth quarter as signs increase that China’s economic rebound is accelerating,” said Teng Tai, a China Galaxy Securities strategist in Beijing. He predicted a “very strong rebound” in earnings. Comments (3)
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