Shares of Chinese companies engaged in traditional industries trading in offshore markets could provide a hedge against the political unrest in Hong Kong in the fourth quarter, according to Citic Securities.
So called old-economy stocks have the advantage of low valuations and potentially lucrative dividend payouts, said China's biggest publicly traded brokerage.
Citic recommends buying the Hong Kong-traded stocks of Industrial and Commercial Bank of China, Anhui Conch Cement and China Resources Power Holdings, whose valuations were all below the multiple for the Hang Seng Index, analysts led by Yang Lingxiu wrote in a research note.
"Old economy" refers to established industries such as banking and manufacturing, which tend to be dominated by state-owned companies in China.
An expanded trial programme unveiled last month by the government in which it allocates shares of state-owned enterprises to the nation's social security fund is set to prompt more dividend payouts among these firms, said the Citic analysts. The state-owned companies are expected to pay more dividends to fill the fund's shortfall, which will in turn force the companies to improve their operations and corporate governance, they said.
The Hang Seng Index added 0.3 per cent to 25,893.40 on Tuesday, as the market reopened after a public holiday. The Hong Kong benchmark was the worst performer among the world's major stock markets in the third quarter, with a decline of 8.6 per cent, as protests rattled the former British colony, paralysing the public transport service, forcing shops to close and deterring tourists.
Investment banks including Bocom International Holdings say the downward pressure on Hong Kong stocks will linger until a solution is found to resolve the political turmoil.
The demonstrations that started in June show no signs of easing, and have escalated into unprecedented levels of vandalism this month after the Hong Kong government introduced a law that prohibits the wearing of face masks.
"Some of the old-economy sector already has a safety margin in terms of valuations now," the Citic analysts said in the report. "Meanwhile, the stock allocation to the social security fund will raise dividend payout significantly."
ICBC traded at 5.7 times earnings in Hong Kong, Anhui Conch at 7 times and China Resources Power at 8.9 times, while the multiple of the Hang Seng Index was 10.1 times, according to Bloomberg data.
Investors should also stay overweight on some Chinese technology companies whose products can be an alternative for imported ones amid the China-US trade war, such as Semiconductor Manufacturing International, Citic Securities said. The brokerage's recommendation on other Chinese offshore stocks included Meituan Dianping and Nasdaq-listed iQiyi.
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