In this second part of the series, we continue to highlight three other key ideas for investments for investors who want to capture positive returns in the Chinese market.
Investors Takeaway: 5 Key Ideas In The Chinese Stock Market By Deutsche Bank
- Oversold Cyclicals: Sharp Contractions Present Opportunities For Investors
DB notes that the market has been in a very defensive mode in China since 2018. Last year, only the utility and telecom sectors saw multiple expansions despite limited positive earnings revision. Sectors such as tech-internet saw sharp multiple contractions as growth fell short of expectations.
The negative reaction to policy uncertainties also signal that market sentiment has been weak. However, DB believes that there exists an opportunity for investors to capitalize on. In particular, the oversold cyclical plays have the potential to provide investors with better-than-market return.
In the oversold cyclicals theme, DB recommends MSCI China index stocks that belong to traditionally cyclical sectors with at least US$2 billion market capitalisation. To qualify as an oversold stock, DB considers only stocks that have fell more than 30 percent since the start of 2018. In addition, DB added price-to-earnings derating and earnings per share cuts criteria to sieve out Chinese stocks that have really been oversold.
Investment Theme Stock Picks: China Molybdenum, Yanzhou Coal Mining, Kingboard Laminates, Yangtze Optical Fibre, Heng Tong Optic Electric, Unisplendour Corp, Fosun International, Hua Yu Automative Systems, Country Garden Holdings, BBMG Corp
- Expensive Defensives To Avoid: Defensives Falling Out Of Favour
One investment theme that investors should definitely avoid is the expensive defensive plays in China. According to DB, these stocks have already shown a strong return last year and are unlikely to repeat its performance given their current share price. DB notes that these companies typically come from the traditional defensive sectors in China like F&B and utilities.
Stocks To Avoid: Huaneng Power, Yihai International, Huadian Power, Shandong Weigao, China Gas, Foshan Haitian Flavouring, China Communications, TopChoice Medical, China TCM, SSY Group
- Bonus: DB’s Preferred Chinese Sector And Stock Picks
Besides the four investment themes, DB also combined its top down and investment theme approach to come up with its preferred sector. DB has shown a preference of the New Economy over Old Economy stocks given the latter’s outperformance in 2018. DB believes that a bottoming-up cycle will drive share price of the New Economy stocks.
Thus, DB recommends investors to go overweight on the following sectors: Media & entertainment, healthcare, insurance, retailing, real estate and diversified financial.
Among the Chinese companies, DB picked the following stocks as its top 20 favoured picks:
(DB’s Top 20) China Everbright Int’l, China Merchant Bank, Zhuzhou CRRC, CSCI, Tencent, Alibaba, Baidu, Xiaomi, Hengrui, Dali, TAL Education, BAIC Motor, Hikvision, Estun Automation, AviChina, Yangtze Optical, Logan, Sunac, Ping An, and Galaxy Securities.