China H Share Euphoria Enters New Stage as Laggards Surge

(Bloomberg) -- The growing frenzy for Chinese offshore stocks has taken a new turn as investors bid up underperformers.

About a third of the companies on the Hang Seng China Enterprises Index racked up fresh one-year highs last week, the biggest proportion since the country’s 2015 stock bubble. Laggards such as PetroChina Co. and China Galaxy Securities Co. have soared, while stubbornly cheap banks are turning red hot.

As a bull market in the China H-share gauge extends into the 715th day, one of the longest in its 23-year history, investors are finding plenty of reasons to buy and few to sell. While technical measures suggest a pullback is overdue, growing confidence around China’s economy and earnings will support the gains for now, according to JPMorgan Asset Management’s Marcella Chow.

“It’s been a very rapid rally but only a change in fundamentals will trigger a correction and people are still quite confident,” said Chow, a Hong Kong-based global market strategist for JPMorgan Asset Management, which oversees $2 trillion worldwide. "It’s all about finding bargains.”

In such a market, any decline is seen as an opportunity to buy. When the gauge finally snapped a record 19-day winning streak on Thursday with a 1.7 percent retreat, it rebounded 2.5 percent the next day as investors pounced on the biggest losers such as banks. At the same time, persistent favorites such as China Vanke Co. and Ping An Insurance (Group) Co. show no signs of slowing down.

As a perennial underperformer itself, due to the index’s dominance by sprawling state-owned enterprises, there’s little for investors to worry about in terms of valuations. Even after an 82 percent bull run, the Hang Seng China Enterprises trades at 8.7 times its members’ projected earnings. That’s a 40 percent discount to the tech-heavy MSCI China Index, while a gauge of global equities is about twice as expensive.

State Plays

Investors have turned to financial and industrial SOEs after spending most of last year piling into tech and Internet shares. Oil giant PetroChina -- which in the past decade suffered the world’s worst-ever stock rout -- has just had its best week in almost two years. Shares of brokers China Galaxy and Haitong Securities Co. flipped to overbought from oversold in about a month.

Growing appetite for financial stocks worldwide has been a boost to the Hang Seng China Enterprises gauge, as half of its components are either banks, insurers, asset managers or brokerages. The sector makes up all but two of the index’s top 10 performers this month, with Citic Securities Co. and Agricultural Bank of China Ltd. up more than 30 percent. Analysts at Morgan Stanley predict even more gains this year.

A slumping Hong Kong dollar is adding fuel to the rally, by making the city’s shares cheaper in other currencies, while inflating the value of Chinese companies’ yuan-denominated earnings. Analysts at Credit Suisse Group AG say new equity funds will attract even more money to large-cap laggards.

"As long as the dollar remains weak, funds will keep flowing into Hong Kong," said Ben Kwong, executive director at KGI Asia Ltd.

Given the tailwinds for Hong Kong’s stocks, investors should stay the course, according to Gavekal Research.

“The Hong Kong market is in a liquidity sweet spot,” Gavekal’s Chen Long wrote in a Jan. 24 note. “Any correction should prove a buying opportunity. The underpinnings of the bull market remain solid: economic fundamentals, valuations and flows all suggest it has further to run.”

--With assistance from Jeanny Yu

To contact the reporter on this story: Sofia Horta e Costa in Hong Kong at shortaecosta@bloomberg.net.

To contact the editor responsible for this story: Richard Frost at rfrost4@bloomberg.net.

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