June 19 (Bloomberg) -- Hong Kong’s Hang Seng Index will climb as much as 10 percent by year-end as a rout for casino operators reverses, said Bank Julius Baer & Co.
Macau gaming companies will outperform the benchmark equity measure as mass-market spending grows steadily, said Kelvin Wong, senior Hong Kong and China equity analyst at Julius Baer, which has about $295 billion under management. Sands China Ltd. and Galaxy Entertainment Group Ltd. are the gauge’s worst performers over the past three months. Funds will also favor Internet and new-energy companies in the second half, Wong said.
The Hang Seng Index slipped 0.5 percent this year through yesterday, buffeted by reports signaling a deepening economic slowdown in China and concern that stricter regulations will curb casino spending in Macau. A 10 percent rally would take the stock gauge to levels unseen since mid-2008.
“China is not as bad as people think,” said Wong in an interview in Hong Kong on June 17, pointing to targeted stimulus and government measures to open state-owned enterprises to private investment. On casinos, “you can see that top-line growth is slowing down but the mass market is still very strong.”
Casino companies posted among the biggest annual gains on the Hang Seng Index from 2010 through last year. They’ve struggled to maintain momentum in 2014 as China’s slowdown curbed high-roller spending and Macau tightened the use of UnionPay Co. debit cards and reduced the transit-stay limit for Chinese travelers. Galaxy Entertainment, Sands China, Wynn Macau Ltd. and SJM Holdings Ltd. dropped an average 21 percent this year through yesterday.
Concern about tighter transit restrictions is overblown, with changes to the limit in 2008 failing to dent spending, Wong said.
Julius Baer is maintaining a preference for so-called new economy companies in Internet, health care and alternative energy, over industries dominated by state-owned businesses.
“The growth outlook is more solid,” Wong said. While valuations are high, they’re not too expensive given the expansion prospects, he said.
Tencent Holdings Ltd. which extended record highs until March before dropping 8.5 percent through yesterday, is valued at 37.7 times estimated profits as of the last close. Medical products maker Shandong Weigao Group Medical Polymer Co. trades at 22.9 times, even after slumping 36 percent from its recent peak in December. That compares with 10.7 times for the Hang Seng Index and 7.3 times for the Hang Seng China Enterprises Index.
While recent data from China including manufacturing and new credit signaled Asia’s biggest economy is stabilizing, analysts project 7.3 percent growth this year, the weakest pace since 1990. The government has rolled out a series of measures this year including reserve-ratio cuts for regional lenders and directives to accelerate home-loan approvals to help meet its official 7.5 percent expansion target.
“The market may trend down in the third quarter before going up again because confidence in China’s economic recovery is still very fragile,” said Wong. “I’m cautiously positive because what government is doing is on the right track.”