A BoA Merrill-Lynch survey shows that between December and January, institutional investors dumped Chinese equities in a hurry. The survey shows a swing from net 15% 'overweight' to net 14% 'underweight'. At the same time, growth expectations in China fell to the lowest level in five months.
In general, economic data coming out of China barely meets market estimates, but we all know focusing on China's statistics is a mugs' game. If you want to make money from this market, you need to look at other factors.
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And what's more, by this time next month, China could look a whole lot different.
On 5 March, the National People's Congress (NPC) will convene, which may give the market an update on the long-term structural changes and targets that China's new leadership is trying to implement. It could contain details on economic growth, money supply targets and a more detailed roadmap of reform implementation.
BNP Paribas expects reforms in local government finances, the financial sector and land to be gradually implemented through the year. This area is the most important aspect of the China story, but which requires considerable investment resulting in fatigue among many investors. However, historically, these kinds of events have led to substantial rallies.
37% in five months?
So how to play this?
At the moment, most of the long-term money is parked, in descending order, in the following sectors: IT, telecoms, consumer discretionary, consumer staples and energy. Hence, most stocks in these sectors are over-owned and come with steep multiples.
Instead, what tend to do well are diversified financials, construction materials, real estate and banks. Other stocks that are out of favour include high beta and those more closely linked to the domestic economy.
Another way to play is the Hang Seng China Composite Index (H-shares) constituting arguably the best companies as they act as the shop window of modern China listed in Hong Kong.
BoA Merrill Lynch found that after the global financial crisis in 2008 and the peak of HSCEI index in November 2010, the market experienced three big rallies lasting on average five months and yielded 37%. That magnitude is supported by the fact the HSCEI index is currently trading at a 28% discount to its five-year average.
There are reasons to be worried about China, but that doesn't mean it's not cheap. I think we could be looking at double-digit gains here, in a short period of time.
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Lars is an emerging-markets expert, with many years of 'on the ground' experience hunting down profit opportunities in Asia. Lars spent ten years living in Malaysia and Thailand, seeking out strategic opportunities, before moving to London to manage the Oracle Asia Absolute Fund. In short, Lars has real knowledge of where the opportunities in Asia are.
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