China Stock Strategists Hunt for Winners as Momentum Fades
A stock market suddenly lacking direction has given China strategists an opening to try to divine the next winners.
Momentum on the Shanghai Composite Index has waned after the benchmark rose about 6% from last month’s low. The gauge trades below its 50-day moving average and is well under a relative-strength measure that warns stocks are hot. Turnover has plunged to less than half of its peak this year.
This period of relative steadiness has given market watchers the opportunity to dig into company financials and government plans to find stocks that could pay off even as China and the rest of the world fight through the virus pandemic. For Nomura Holdings Inc. and JPMorgan Asset Management, one key is a firm with a healthy cash flow, which should help it navigate the tough economic conditions.
Other factors that strategists are considering are which corporates will benefit from domestic demand as Chinese policy makers roll out support measures as hoped, and whether a stock pays good dividends. Here’s what market watchers say to look for when picking the next winners.
While the pandemic clouds the situation in stocks, one focus now should be on firms’ cash flow to make sure they can overcome any debt problems, said Chaoping Zhu, a global market strategist at JPMorgan Asset Management.
Echoing this was Chetan Seth, a strategist at Nomura, who said the ability to generate sustainable free cash flow, maintain sufficient cash reserves and keep debt low will be crucial measures of whether companies can cope with the crisis. His picks based on these criteria are mostly industry leaders, including Tencent Holdings Ltd., Xiaomi Corp., China Mobile Ltd. and liquor producers Kweichow Moutai Co. and Wuliangye Yibin Co.
Strategists including Hanfeng Wang at China International Capital Corp. wrote in a recent note that they expect regulators to identify several specific areas of the economy that need relief measures. “In the short term, we suggest paying attention to policy-sensitive, purely domestic-demand sectors,” CICC said, citing the infrastructure, consumer and real estate industries as the government pushes forward with urbanization.
The brokerage’s top picks include Anouilh Conch Cement Co., cookware manufacturer Zhejiang Supor Co. and Poly Developments and Holdings Group Co.
A New Plan
China is moving forward with an industrial policy it calls “new infrastructure,” which will see investment put into certain tech-focused sectors. The nation’s top economic planner provided some details on the plan on Monday, and the next day shares of satellite companies rose. The initiative could help related cloud data center firms boost earnings by about 30% this year and 5G companies could see growth of 20%, according to UBS strategists including Eva Lee.
Citigroup Inc. named some tech companies it sees benefiting from the plan, including communications equipment maker Foxconn Industrial Internet Co., construction software company Glodon Co. and broadband provider Beijing Sinnet Technology Co.
A flight to safer assets has spurred a rally in government debt around the world, with the yield on China’s 10-year sovereign notes last month falling to the lowest since 2002. Investors should now switch their focus from bonds to stocks that deliver good cash payouts, Industrial Securities Co. said in a recent note. The brokerage named China Shenhua Energy Co., China Petroleum & Chemical Corp. and Baoshan Iron & Steel Co. as good choices for the dividends they pay.
©2020 Bloomberg L.P.