What Investors Should Buy Before China’s Top Policy Meeting

(Bloomberg) -- Investors should buy Chinese technology and health-care stocks before the country’s annual meeting of parliament.

That’s according to money managers and brokerages including Citigroup Inc. and Baptized Capital Co. They say authorities will likely call for enhancing the manufacturing sector’s competitive edge, and the virus outbreak means prevention and control of epidemics will top the agenda of policy makers.

Volatility in Chinese stocks is near the lowest level this year as authorities favor stability before the National People’s Congress. The gathering usually takes place in early March but was postponed to May 22 this year. Traders hope the meeting will revive the market, with specific stimulus measures unveiled and infrastructure and other projects pushed forward after lawmakers approve the government’s budget.

“Policy makers will likely put more emphasis on technological development to optimize industrial structure as they seek to recoup the economic losses” caused by the pandemic, said Yin Ming, vice president of Shanghai-based investment firm Baptized Capital Co. “They’ll also pay more attention to improving weak links in the domestic medical sector as well as epidemic prevention and control.”

Here are some areas that investors and analysts expect to receive policy help at the NPC:

Technology

Investments will be increased in digital infrastructure, including big data and the 5G network, Yin said. He has holdings in both tech and health-care stocks, and expects any mention of the sectors at the NPC to give the shares “at least a short-term boost.”

Trade friction with the U.S. will also force China to focus more on home-grown tech and products to replace imports, said Chen Li, chief economist with Soochow Securities Co.

The U.S. announced Friday rules aimed at curbing chip supplies to Huawei Technologies Co., spurring a rally in Chinese semiconductor stocks on bets Beijing will step up development of domestic tech sector. China’s state-backed funds pumped $2.25 billion into a Semiconductor Manufacturing International Corp. wafer plant to support advanced-chip making, the company said in a statement on the same day.

Huaxi Securities Co. said in a note dated last week it expects investors to continue piling into themes like artificial intelligence, big data and cloud computing, with innovation seen as a key topic at the NPC sessions. Its picks include Shanghai Baosight Software Co., Beijing E-Hualu Information Technology Co. and Amethystum Storage Technology Co.

Health Care

Preventing infection was stressed repeatedly at April’s Politburo meetings. That suggests authorities are prioritizing outbreak containment over stimulating the economy, which will be reflected in policies coming out of the NPC, Tianfeng Securities Co. analysts led by Liu Chenming wrote in a note dated May 10. A big chunk of government spending will flow to sectors including vaccines and medical equipment, according to the note.

Top leaders said last month that’ special sovereign bonds tailored for epidemic control would be sold as part of efforts to offset virus impact.

Infrastructure, Urbanization

Building more metropolitan areas and city clusters can add up to 1 percentage point to China’s economic growth per annum in the next 5-10 years, Citi analysts led by Pierre Lau wrote in a May 10 note. That should benefit industrial park operators and developers with land banks in big cities, Citi said, naming Shimao Property Holdings Ltd. and Longfor Group Holdings Ltd.

Huaxi Securities said that after the NPC it expects investment to pick up in infrastructure projects, including high-speed railways and toll roads.

Consumption

Industries that are still reeling from the impact of the pandemic -- specifically automakers and firms in the cinema, restaurant and tourism arenas -- will likely get targeted policy support from the NPC, according to Tianfeng. That should be a catalyst for stocks in those sectors, which have been sliding due to bad earnings, it added. China has already exempted the film industry from value-added tax this year.

Brokerages

A more detailed blueprint to overhaul the nation’s financial market could also be revealed at the NPC, Haitong Securities Co. analysts including Xun Yugen wrote in a note dated May 10. An acceleration of the reform, which has increasing bond and equity financing as a key aspect, will help the earnings of securities firms, it said.

State Firms

China will likely be forced to speed up the restructuring of its state-owned enterprises to improve their efficiency as the Covid-19 hit overseas demand, according to Haitong Securities. Valuations of many SOE-dominated industries, if measured by price to book ratio, are at historical lows and an acceleration of reforms in the segment could trigger a recovery, the broker said.

©2020 Bloomberg L.P.

With assistance from Bloomberg