Surging recovery bets on China stocks face reality check
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By Jason Xue and Tom Westbrook
SHANGHAI/SINGAPORE (Reuters) – Chinese investors are doubling their bets on an economic recovery, with a spate of new funds launched this week on optimism about an end to COVID restrictions, although wealth managers warn the next wave of market gains may be over will be less broad -based.
Both China’s blue-chip index CSI300 and the Shanghai Composite Index are up more than 2% in a shortened week of trading as markets hailed Beijing’s abrupt end to lockdowns and travel quarantine.
More than 30 mutual funds launched this week, mostly equity-focused, offering vehicles for recovery bets. Last month, sector-specific exchange-traded funds drew net inflows of more than 2.5 billion yuan ($364 million), according to Sinolink Securities, as investors sought exposure to technology, new energy and defense.
Hong Kong’s Hang Seng rose as much as 8% this week to a six-month high.
But with tourism, hotel and catering stocks up more than 20% since November and mainland China developer shares nearly doubling since late October, some say trading is now feeling too crowded.
“Travel and leisure stocks have already priced in a fairly bullish recovery and have become fairly crowded trades. We have to be careful here,” said Qi Wang, CEO of MegaTrust Investment (HK), who warned the road ahead could be bumpy.
“Today’s homebuyers…lack the confidence and price optimism to pull the trigger. We are concerned about the continued weakness in real estate and the negative impact on the Chinese economy.”
Wang said advanced manufacturing is his main focus this year, and he’s also bullish on healthcare and internet stocks, where regulatory risks appear to be receding.
Another wealth manager, Li Xiaohua of Harfor Fund Management Co, said he had increased exposure to tourism stocks in recent months, betting on a “reversal of bad luck,” but believes the game is now entering a new phase.
“We anticipate performance divergences in the industry … and we will pay more attention to company fundamentals going forward.”
Rising infections and even anecdotal reports of strains on healthcare systems and crematoria have yet to derail optimism that recovery is imminent.
“For us investors, the sooner we see the infection peak, the better it is,” said Liu Guojiang, fund manager at Tianhong Asset Management, who expects many places in China to experience peak infections ahead of the Chinese Lunar New Year in late January.
Yang Delong, chief economist at First Seafront Fund Management, expects China’s economic growth to top 5% this year as COVID curbs are lifted. This compares to consensus expectations of around 3% growth in 2022.
But as prices firm along with hopes, it also means fewer opportunities in obvious places amid a fragile global outlook.
Cao Ludi, fund manager at Fullgoal Fund Management, is forecasting an ‘N-shaped’ economic recovery as an expected spring pick-up in second-quarter activity is likely to face a harsh reality check.
She advised against chasing the high-flying real estate and tourism stocks as their “fundamentals remain a question mark.”
The real estate sector, which accounts for a quarter of the economy, is fraught with risk and was hit hard last year as cash-strapped developers were unable to complete housing construction.
Economists expect price declines may moderate this year as authorities have pledged support, but declines are still forecast.
Still, the tide of change is lifting all boats and as global markets falter, it is luring back foreign investors who had largely reduced their exposure in 2022, particularly in sectors exposed to the Chinese consumer.
“Investors should look to the reopening of trading in internet stocks’ apparent liquid consumption proxies,” said Christopher Wood, global head of equities strategy at Jefferies.
“The virus will probably move through the population faster than anyone can imagine. This should spell economic recovery by Q2, if not sooner.”
($1 = 6.8715 Chinese Yuan)
(Additional reporting by Samuel Shen; Editing by Sam Holmes)