|
 Attracted to stock valuations near their lowest in at least a
decade, investors have pushed the Shanghai Composite Index <.SSEC>
up about 6 percent and an index of the top Chinese listings in Hong
Kong <.HSCE> up 13 percent in a rally that started roughly three
weeks ago.
While investors are not convinced the recent bounce in Chinese
assets will blossom into a true rally, they said the sheer scale of
Beijing's financial sector reforms would be positive in the medium
and longer term.
"Things are heading very much in the right direction," said Bill
Maldonado, chief investment officer in Asia-Pacific for HSBC Global
Asset Management.
"What would you call the widening of the currency bands? What would
you call the way that that default happened? What would you call the
increase in quotas? All these things are clear evidence of reforms,"
Maldonado said.
HSBC, which manages assets worth $428 billion globally, is
overweight on China in its regional portfolios.
Since unveiling an ambitious reform blueprint last October, Beijing
has embarked on reforms including overhauling its bloated
state-owned sector, widening the currency's trading band and
increasing investment quotas in a push to allow market forces a
greater say in its markets.
Those reforms have included allowing smaller companies to default,
with China recording its first domestic debt default in March.
This has spooked many credit investors, but money managers said this
would lay the foundation for sustainable economic growth and
possibly higher stock prices in the near term.
Funds are now raising their exposure to China even though some
investors have pulled cash from these funds over the past few months
because North Asia-focused funds have underperformed funds invested
in other regions.
A March report from HSBC said stock mutual funds had raised their
exposure to Chinese equities to near five-year highs, significantly
turning overweight on China from being underweight three months
earlier.
Another reason for this shift is that Chinese equity valuations now
look cheap after a wave of aggressive selling early in the year.
Investors pulled out about $1.8 billion from China-focused equity
and exchange-traded funds in the first quarter, according to Lipper
data as of April 3.
Andrew Swan, head of Asian equities at the world's biggest money
manager BlackRock, said the reforms added stability and better
growth prospects, and would improve the way companies are managed in
China by allowing market forces to direct credit to the most
productive sectors of the economy.
ROCK-BOTTOM VALUATIONS
"We can't just disregard China because of the problems of the past,
because it's actually very cheap with change happening," Swan said.
Swan manages BlackRock's $654 million Asian Dragon Fund, 39.4
percent of which is invested in Chinese- and Hong Kong-listed
companies as of the end of February.
Even after their recent bounce, Chinese equities are still 50
percent below their April 2007 peaks. By contrast, India's markets
hit a record high last week, while Indonesia is approaching last
year's peaks on reform hopes.
[to top of second column] |
The IBES MSCI China Index trades at 1.33 times book value, near its
cheapest levels since Thomson Reuters Datastream began compiling the
data in 2004, and more than 77 percent below its 10-year median.
The index trades at 8.3 times forward 12 months earnings, 26 percent
below its 10-year median. By comparison, India trades at 14.4 times,
while the broader Asia-ex-Japan market is trading at 11.6 times,
according to Thomson Reuters Datastream.
Money managers said that without far-reaching reforms, cheap stock
valuations would only get cheaper in the coming years as growth
faltered.
"In the case of China what we are seeing is change starting to
actually happen. Without change, the risk is that markets and stocks
would be a value trap," Swan said.
CAUTIONARY NOTES
Not all investors are so optimistic, however. Some caution that the
reforms, while necessary, would be painful and could cause growth to
slow in the short term.
These more bearish investors said they were sticking to sectors such
as property, railways and banks that would benefit from any minor
stimulus measures Beijing might launch in order to shore up growth.
"There's no such thing as painless reform. The price you pay is to
have slower growth. That's the whole idea," Franco Ngan, chief
executive officer at Zeal Asset Management, said at the Credit
Suisse annual conference held in Hong Kong late last month,
suggesting valuations were low precisely because prices reflected
lower growth prospects.
While corporate earnings in China have surged 75 percent in the past
seven years, the MSCI China Index has plunged 40 percent, Ngan
noted, reflecting the extent of negativity already being priced into
the Chinese equity market.
"I do think valuations are arguably a bit more detached than
fundamentals," said Tai Hui, chief markets strategist at JP Morgan
Asset Management in Hong Kong.
In a sign of how beaten down some of these valuations have become,
stocks from the financial and industrial sectors, often seen as
front and center for any China-related problems, have led the market
rally in recent weeks.
(Reporting by Nishant Kumar and Saikat Chatterjee;
editing by Nachum
Kaplan and Chris Gallagher)
[© 2014 Thomson Reuters. All rights
reserved.] Copyright 2014 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
