Investors in Chinese mainland equities should stay on defense
Tech stocks rallied today and stimulus is about to be unleashed, but wise investors should probably remain conservative, says Gerard DeBenedetto.
Mainland equities probably haven’t bottomed yet, but it might be happening now after a year-to-date decline of 20% for the CSI 300 (the major Chinese market index). Investors are recalculating growth rate declines as a result of COVID shutdowns and the potential floor that Beijing will provide via stimulus.
The discount rate for COVID lockdowns is hard to calculate, as some positive news of easing of restrictions in Shanghai is matched with negative news out of Beijing. The real economy effects of the COVID lockdowns can be seen in shipping volumes and productivity declines. According to Freight Waves, an industry group that tracks global supply chains, the Shanghai port efficiency is down 20–30%, while container demand out of China to the U.S. dropped 31% between April 6 and 15. China remains an export economy and the logistics snarl-ups put pressure on GDP growth. This kind of bad news will push earnings and expectations down further.
Conversely, government spending and other supply-side tools are in the pipeline. This week, Xí Jìnpíng 习近平 called for more projects in transportation, energy, and water conservancy, as well as new facilities for supercomputing, cloud computing, and artificial intelligence. This is on top of the previously announced cuts in reserve requirements, foreign exchange holdings, and outright tax cuts. In a note to investors, Citi analysts said they believed infrastructure investment is likely to surge by 8% in 2022, sharply higher than the 0.4% increase seen in 2021.
The dots are easy to connect: In fact, the large infrastructure index on the mainland has already outperformed the market by 15% year to date. The large infrastructure companies will see a two-pronged benefit:
- They will get preferred lending rates from the largest banks.
- They will win the largest infrastructure contracts.
These companies already trade at price-to-earnings ratios that would be considered “value” and that’s exactly where investors should be hanging out with their China allocations. These companies include:
601390 中国中铁 China Railway Group
601669 中国电建 Power Construction Corporation of China
601800 中国交建 China Communications Construction
601985 中国核电 China National Nuclear Power
601698 中国卫通 China Satellite Communications
003816 中国广核 CGN Power
601868 中国能建 China Energy Engineering
600900 长江电力 China Yangtze Power
601618 中国中冶 Metallurgical Corporation of China
600050 中国联通 China United Network Communications
601668 中国建筑 China State Construction Engineering
600018 上港集团 Shanghai International Port (Group)
600886 国投电力 SDIC Power Holdings
601186 中国铁建 China Railway Construction
600025 华能水电 Huaneng Lancang River Hydropower
600905 三峡能源 China Three Gorges Renewables (Group)
601728 中国电信 China Telecom
This is not a portfolio but rather a sampling of the companies allocators should target as long as macro conditions are still uncertain, and stimulus hasn’t fully been deployed. These are companies with strong earnings, low price-to-earnings multiples, and a history of dividends payments.
A-Share Intelligence is a weekly column.
