Manulife Buys China H-Shares on Bet Stimulus Will Spur Rebound

May 28, 2014 3:33 pm ET

May 28 (Bloomberg) -- Manulife Asset Management is buying Chinese stocks for the first time this year, betting that government steps to buoy growth will finally boost the lowest equity valuations in Asia.

Manulife shifted money into Chinese shares traded in Hong Kong this month from India after that country’s bourse surged in the run-up to national elections, said Ronald Chan, head of Asian equities at Manulife, which oversees $269 billion. Investors are too focused on economic data that doesn’t yet reflect efforts by Chinese policymakers to put a floor under the slowdown, Chan said.

“People have said China’s been cheap, but there’s been no catalyst,” Chan said in a May 22 interview. “I think we’re beginning to see that catalyst coming through. We continue to invest in growth-related names because they can deliver in terms of earnings, and we barbelled that with what we think will benefit on the back of reforms.”

The Hang Seng China Enterprises Index, also known as the H- share index, slumped 6.8 percent this year through yesterday amid what analysts project will be the nation’s weakest economic growth since 1990. Manulife joins ABN Amro Private Banking and AMP Capital Investors Ltd. in expecting a rebound, while UBS AG sees the biggest Chinese equities dropping 20 percent this year as a weak property market and depreciating yuan curb earnings.

“If you only look backwards, you’re in a quite painful situation but one has to look forward,” Chan said. The H-share measure will rebound 10 percent by year-end and Manulife favors high-growth companies as well as those that will benefit from the nation’s policy shifts, such as the opening of state-owned oil and gas businesses to private capital, he said, while declining to name specific stocks.

Slowing Growth

China Petroleum & Chemical Corp., the refiner known as Sinopec that has signaled its intent to attract private backers, climbed 10 percent this year through yesterday. PetroChina Co., also opening up to non-state investment, was up 11 percent. The H-share measure rose 0.2 percent today as of 9:59 a.m. in Hong Kong.

Investors are weighing how far the government will go to bolster growth. Premier Li Keqiang said last week China will fine-tune policy when needed to solve problems such as tight liquidity, especially for small companies. The comments may signal incremental stimulus such as looser borrowing conditions and further support for the property market, Goldman Sachs Group Inc. economists led by Yu Song wrote in a May 26 note.

To counter the slowdown, the State Council outlined railways and housing spending in April along with tax relief for small businesses. The reserve-requirement ratio for some rural banks has been cut by as much as 2 percentage points. Even after the H-share gauge rebounded from March 20 when it entered a bear market, the measure is still one of the worst performers among emerging-market benchmark indexes this year.

‘Expectation Gap’

“What we’ve been getting is a lot of mini-stimulus so there was a bit of an expectation gap,” said Manulife’s Chan. “But if you put it all together, that gives you a much fuller picture.”

Government steps to stabilize the real-estate market will help infrastructure companies and cement makers, Chan said. Anhui Conch Cement Co., the nation’s biggest producer of the building material, slumped 19 percent from the end of March through yesterday as reports showed new building construction fell 22 percent in the first four months of the year and new- home prices rose in April in the fewest cities in a year and a half.

Chen Li, UBS’s chief China equity strategist, estimates companies in the nation’s CSI 300 Index will post a 3 percent drop in earnings this year, versus consensus forecasts for a 14 percent gain. As analysts downgrade projections to account for a weak property market and depreciating yuan, China’s biggest non- bank stocks may extend this year’s drop to 20 percent, Chen said earlier this month.

‘Down Year’

“It will be a down year for stocks,” Chen said in a May 13 interview at the Swiss bank’s office in Shanghai. “Property will be the biggest risk.”

Manulife is loading up its bets on the beneficiaries of supportive government policies with so-called “new economy” companies that have shown they can profit from China’s expanding consumer sector and grow quickly with less state help.

Among technology stocks, Chan prefers e-commerce platforms over game developers because of their growth prospects in other sectors such as banking and insurance, he said. Tencent Holdings Ltd., Asia’s largest Internet company that owns a mobile-payment service, this month reported first-quarter profit surged about 60 percent.

Earnings Multiples

The H-share gauge traded at 7 times estimated earnings at the last close, the lowest among Asian benchmark gauges, compared with 15.5 times for India’s S&P BSE Sensex. The Standard & Poor’s 500 Index, which continues to mark new highs on signs of a U.S. economic recovery, traded at a multiple of approximately 16.2 times.

“If you look at any reform it takes time for it to come into economic data,” said Chan. “Hopefully we’ve seen the floor of it and we will see some protection for the downside. The upside is a function of further stimulus, the U.S. recovery and general fund flows coming from the U.S. to this part of this world.”

--With assistance from Nikolaj Gammeltoft in New York.