Defensive Tilt in China Stocks Shows Sentiment Is Shifting
Mainland investors are going on the defensive: this week’s top-performing industries in the CSI 300 Index have been utilities.
(Bloomberg) -- Stocks that drove China’s world-beating rally in the past five weeks are now lagging the market, a sign that that bullish sentiment is fading.
Mainland investors are going on the defensive: among this week’s top-performing industries in the CSI 300 Index have been utilities -- used by stock investors as bond-proxies, as well as consumer staples and telecom shares. The industries typically perform better during periods of slower growth, unlike the highly cyclical tech and material groups.
China’s CSI 300 touched a two-year high last week, rebounding as much as 14% from its coronavirus low, as investors took advantage of easier liquidity conditions and cheap funding to bet on some of the most speculative parts of the market. That exuberance had driven the small cap ChiNext Index to a three-year high, and stoked a 32% rally in a gauge of technology stocks before global stock declines hit A shares late last month. They’ve now lost 11% and 17% respectively from their February peaks.
Stocks plunged again on Thursday, as concerns over the economic impact of the coronavirus outbreak deepened after President Donald Trump announced a plan to restrict travel to the U.S. from Europe. The tech-heavy ChiNext Index underperformed the benchmark Shanghai Composite, closing 2.6% lower.
“The global stock rout has hurt sentiment in A-shares, so many are expecting a correction,” said Jackson Wong, asset management director at Amber Hill Capital Ltd. “But there are still some hot corners in the market that speculative money is moving into, including infrastructure and 5G.” He added President Xi Jinping’s visit to Wuhan this week was a further signal the outbreak has stabilized in China, giving room for authorities to focus on boosting growth.
Infrastructure stocks are expected to be popular in the short term, said Sun Jianbo, president of China Vision Capital in Beijing. Sun, who has reduced his tech positions bought in early February, also remains bullish on snack food makers. “The tech sector looks less attractive for now,” he said.
Global markets have been hit by panic selling on escalating concerns over the fallout from the global coronavirus spread. Compounded by an oil price crash, indexes globally have been dragged into bear markets this week. Hong Kong’s stocks were on Thursday poised to narrowly escape their second bear market in as many years.
With volatility and leverage both at the highest levels in four years, questions remain as to whether China’s equity market can maintain its relative resilience. Investors point to the Shanghai Composite Index trading at around 11 times projected earnings, compared with more than 16 times on the S&P 500 index, as a signal that the uptrend has room to continue despite the faltering tech rally.
“We’re better off than offshore markets in terms of virus outbreak containment, lower overall valuations and bigger policy room,” said Dai Ming, a fund manager with Hengsheng Asset Management Co.
“Chinese stocks will fare better than global peers despite some short-term pullback.”
--With assistance from Sofia Horta e Costa.
To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net;Jeanny Yu in Hong Kong at jyu107@bloomberg.net
To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins, Fran Wang
©2020 Bloomberg L.P.
With assistance from Bloomberg