Brokers avoid industrial and property stocks, as credit tightens, defaults increase
Dilip Shahani, head of global research, Asia-Pacific at HSBC is especially unnerved that many of the troubled companies involved are aligned to central state-owned enterprises in smaller provinces
Hong Kong retail securities brokers are becoming increasingly concerned about the immediate fortunes of industrial and property-related mainland stocks, given the tightening in money supply and pressure to cut debt by companies and banks.
Will Shen, Fundsupermart.com’s online director, portfolio management and research, says he is steering clear completely of Chinese industrial stocks, given China’s A-share market has been underperforming as the government continues its campaign to encourage slashing corporate debt.
That is already creating risks as the number of defaults rises, Shen said, sparking investor worries of sharply tighter credit in the economy.
If China’s credit market remains tight, resultant falling property sales could also expect to lead to a decline in nominal GDP growth to 10 per cent from 11 per cent last year, even though official real GDP growth is likely to stay at 6.5 per cent, Shen added.
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At the same time China’s declining M2 and social aggregate financing, measures of China’s broad money supply and credit in the economy, shows weakening demand for funds, he added.
Aggregate financing stood at 1.56 trillion yuan (US$243 billion) in April compared to last year’s average of 1.62 trillion yuan, official data showed.
“As social financing declines, this is not good for onshore funds, which means China’s nominal GDP will slow and property sales will also have negative growth,” Shen said.
“In turn corporate revenue and profits, because nominal GDP growth has historically been correlated with the revenue growth of Chinese A- and H-share listed companies, have been pressuring industrial stocks.”
Dilip Shahani, head of global research, Asia-Pacific at HSBC agrees that the rising numbers of domestic corporate defaults certainly cannot be dismissed, and is especially unnerving that many of the troubled companies involved are aligned to central state-owned enterprises in smaller provinces.
Shahani feels financial market liquidity conditions will continue to slowly deteriorate, with banks having to repay sizeable amounts of medium-term loans back to the People’s Bank of China before the end of the year year-end, which provides little help to Chinese issuers that face hefty refinancing pressure for the coming two years.
The mainland’s CSI 300 – which tracks large caps listed in Shanghai and Shenzhen – has seen a slump of 9.44 per cent this year, producing investment negative returns of 5.7 per cent over the past five months.
That is the second-worst performer among the world’s top 20 markets after Jakarta’s Composite Index, which returned negative 5.9 per cent, according to Fundsupermart data.
Overall, however, Shen remains positive on China’s financials and technology stocks, seeing room for revaluations from current low levels.
Fabiana Fedeli, global head of fundamental equities and senior portfolio manager emerging markets at Robeco Institutional Asset Management, meantime, said foreign investors remain keen to add their exposure to China’s A-share market, but on a long-term basis.
“In China there are higher growth opportunities to account for valuations. We can find more exposure to growth in the A-share market than in H shares,” Fedeli said, adding she currently favours small and mid-sized stocks, because of their more vibrant and growth opportunities compared to large caps.