China's SOE, tech stocks rally to strengthen as traders seek shelter from faltering economic recovery, say brokerages
A rally in Chinese state-owned enterprises (SOEs) and technology stocks is likely to get a further boost in the second half of the year as investors seek shelter from a weak economic recovery, according to the midyear strategy reports of some brokerages.
CSC Financial, Western Securities and Northeast Securities recommended the stocks, saying listed SOEs will remain attractive because of their appealing valuations and dividend payouts, while the boom in artificial intelligence (AI) will drive investment in the technology sector.
The vote of confidence comes after some investors called into question the sustainability of the trades in light of some recent pullback. SOEs from banks to telecoms operators, and tech companies, are among the few sectors in the onshore market this year to have shown resilience as China's slower-than-expected recovery from Covid-19 dashed hope of an across-the-board gain in stocks.
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"Looking into the second half, China's policies will focus more on the quality of growth, so the magnitude of the economic and earnings recovery will be limited," said Deng Lijun, a strategist at Northeast Securities. "There is limited upside room for the stock benchmark, which is most likely to be rangebound.
"All the factors bolster the case that the trade in TMT [technology, media and telecoms] stocks and SOEs can carry on."
The latest economic data released by the statistics bureau on Tuesday has reinforced pessimism about growth and strengthened the view that thematic investments will dominate trading in the absence of catalysts. Industrial output, retail sales and fixed-asset investment all trailed analysts' estimates in April, adding to evidence that China's recovery is running out of steam after the removal of all pandemic restrictions late last year.
The benchmark CSI 300 Index has risen about 3 per cent this year, with the gain spurred by the reopening of the economy fading recently. Its sub-gauge of technology stock has climbed 11 per cent and a measure of central SOEs has gained 9 per cent.
The SOEs play will continue to thrive thanks to the rising number of new funds targeting the sector, according to Western Securities. At least 12 mutual fund managers have applied to the regulator to sell exchange-traded funds (ETFs) tracking central SOEs since March, with three of them already having received approval, it said.
"The state-owned economy is the ballast of China's economic and social stability and has a pillar position in the areas concerning national security and economy," said Yi Bin, a strategist at Western Securities.
China's SOEs, traditionally shunned by investors for their low growth potential, high debt ratios and their social responsibility burden, are enjoying their moment of glory after the stock-market regulator called for a new methodology for valuing their stock. The momentum has strengthened recently after sluggish economic growth prompted rotation into low-valuation bets and the Shanghai Stock Exchange hosted seminars to promote SOE investments.
SOEs have a total market values of 47.6 trillion yuan (US$6.8 trillion), representing half the capitalisation of China's onshore market, according to Western Securities. They generated combined revenue of 11.3 trillion yuan in the first quarter of 2023, contributing to 66 per cent of the sales for all listed companies.
In the offshore market, insurers, Macau casino operators, brewers and railway equipment makers may stand out for the rest of the year because of a turnaround in their earnings, said Edmond Huang, a strategist at Credit Suisse Group, in a webinar on Tuesday.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2023 South China Morning Post Publishers Ltd. All rights reserved.
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