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 Foreign investors are tentatively buying in sectors linked to the
main themes of the 13th Five-Year Plan released earlier this month,
including urbanization, consumption, internet growth, green
development and innovation.
The MSCI China index has gained 17 percent since Feb. 12 and
while foreign investors are still net sellers the scale of net
selling has shrunk to $272 million from March 1 to March 25 versus
an average of $2.1 billion over the previous four months, according
to EPFR Global data.
Most investors are focusing on specific "new economy" industries,
which make up only a small proportion of the market, while avoiding
those sectors linked to the "old economy".
"China's transition to a consumption and service-led economy is
likely to be a bit painful, and it's worse for the stock market
because 70-80 percent of the market is highly dependent on the
infrastructure and investment-led economy," said Tan Eng Teck,
senior portfolio manager at Nikko Asset Management in Singapore.
"But the remaining 20-30 percent is growing, and we like those
sectors because they're in a multi-year growth phase."
Beijing's five-year plan aims to create at least 10 million urban
jobs, boost research and development investment to 2.5 percent of
gross domestic product by 2020, develop alternative energy sources
and reduce emissions, and expand internet penetration.
Tan's prefered sectors include tourism, insurance, environment and
healthcare. Among the biggest holdings in Nikko's China equity fund
and Shenton Greater China Fund are Ping An Insurance, internet firm
Tencent and China Traditional Chinese Medicine Co.
M&G Investments combines the internet and consumption growth themes,
with recent purchases including an online travel agency listed in
the U.S., said Matthew Vaight, M&G portfolio manager for global
emerging markets in London.
Internet firm Baidu and mobile operator China Unicom are among the
top 10 holdings of M&G's Global Emerging Markets fund.
However, Vaight cautions that some "new economy" stocks are
overvalued, and sees opportunities for value investors in
"relatively dull but under-appreciated areas of the market," such as
some packaging and plastic pipe companies.
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Banks and commodity sectors are seen as value traps. Vaight warns
that banks are keeping many struggling "old economy" companies going
when they should not.
Tan cautions overcapacity in commodities sectors such as steel and
aluminium means that prices, despite very low valuations, could yet
fall further.
Barings Asset Management also favors "beneficiaries of rising
consumption and technological outfitting as Chinese companies move
up the value chain," investment director William Fong said in a note
last month.
For instance, Barings is investing in China's population expansion
and improving environmental standards through a utility company that
supplies water to Hong Kong, Shenzen and Dongguan, he said.
Barings also likes Chinese entertainment companies, betting on
increases in both the number of cinemagoers and locally produced
films.
"With share price valuations having moved quite sharply in recent
weeks, we have taken the opportunity to reassess companies we
previously liked but where we felt the price was too high," said
Fong.
(Reporting By Nichola Saminather; Editing by Eric Meijer)
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