By Thomas Streater
Erwin Sanft may have departed the shores of New Zealand a couple
of decades ago after earning a degree in finance and economics from
the University of Auckland, but you can still detect a Kiwi accent
as he discusses China's and Hong Kong's economies and markets.
Having moved to China to study Mandarin at Nanjing University,
and after a stint working at the New Zealand Consulate General in
Shanghai, Sanft moved into the markets with broker CLSA where he
became the top-rated China utilities analyst and number-three rated
China analyst. After nearly nine years heading up BNP Paribas'
China and Hong Kong research effort, he joined Standard Chartered
in 2013 with the twin roles of head of China and Hong Kong research
and China equity strategist.
The easygoing Sanft quickly showcased his deep knowledge of both
markets when he recently sat down with Barron's Asia to discuss the
prospects for China and Hong Kong stocks in 2015. Chatting in the
bank's offices in Hong Kong's towering International Finance
Centre, Sanft discussed some favored mid-cap stock picks and
predicted Hong Kong's Hang Seng Index would finish 2015 at 26,000
points, about 10% higher than it currently trades.
Barron's Asia: What's your outlook for China and Hong Kong
stocks in 2015?
Erwin Sanft: Our view is that we can divide this year down the
middle. The first half of the year will be quite good, similar to
what we've enjoyed in the fourth quarter of 2014, but then as we
get into the year the headwinds will grow stronger. So indices will
go up in the first half and they'll go back down again in the
second half. Even if we divide the first half into first and second
quarters, we see this year's returns as very front end loaded.
China will do further easing. It's a reality. People calling for
many rate cuts may prove to be wrong, but we've got at least
another one or two rate cuts to come in the early part of 2015.
That will be a key driver.
We expect the credit multiplier in China to pick up. Credit
growth is always a good lead indicator on the real economy and it
is the one the stockmarket follows. The headwinds are that credit
easing is going to start working, but when it starts working the
government will then tighten credit.
Most of the money you will make in 2015 will get made in the
first three months. The problem is always how do you mentally
switch into defensive mode as people often do it too early and then
they have to get back in.
By the second quarter people will have to think in terms of
structural growth on a three to five year view. This means picking
sectors that will grow longer term rather than just being in more
risky cyclical trades. I don't have to go into pure defensive mode,
but I have to go back into growth stocks. But right now everyone is
still underweight cyclicals, but we've still got money at the
margin going into cyclicals, which we think in the next three
months just keeps pushing them up.
In terms of ranking, we would say A-shares will be the top
performer in the first half of the year as they are most sensitive
to policy. H-shares in Hong Kong will be next, and then Hong Kong
shares are going to be the laggard. If you can, you should avoid
Hong Kong shares and just have China shares.
Q: What A-shares would you recommend if an investor had to buy
on January 1 and sell on December 31?
A: There are three tiers to A-shares. There are the large/mega
caps which are mostly state-owned enterprises. Then you have the
interesting band which is the mid-caps, which are stocks with
market caps between $3 billion and $10 billion and which offer lots
of value. Even though the new economy names in that band are
expensive, there are many other sectors like consumer, machinery,
IT equipment which are undervalued. So if you are investing on
January 1st you can happily invest in the A-share mid-cap band.
About 80% of trading is in the third band, which are small caps.
Small caps should be avoided because this is the playground of
retail money. Among large stock markets globally, A-share small
caps trade at the highest premium to the overall market. The
A-share small-cap average price-earnings ratio is at a 280% premium
to the A-share overall market price-earnings ratio. This compares
with a 50% premium in the US and a 10% discount in Hong Kong. Also,
you don't know what's going on in that market and the news flow is
just intense and often inaccurate.
Mid-caps, which better fit the 12-to-36 month view of mature
investors, are a very interesting place to be this year,
particularly because A-shares have no correlation with global
markets. If you are worried about the U.S. market being toppy, or
that Europe is going to have more problems, well the A-Share market
doesn't care.
Q: So which mid-cap stocks do you prefer?
A: We like globally competitive industrial companies.
Zhengzhou Yutong Bus (600066.CH) is the world's largest bus
maker. It's cheap as chips. It is seen as old economy, but people
miss the fact that it's growing its global market share. Weifu
High-Tech (000581.CH) is a fuel injection equipment maker and a
partner of Bosch and is an excellent company. Fuyao Glass
(600660.CH) is the world's number four auto glass maker. It is
still really cheap.
When I say cheap, these are stocks which are 10 times P/E or
below, they've got good dividend yields, and they've got good
corporate governance. These three do stand out in terms of being
globally competitive.
TBEA (600089.CH) is the world's third largest large-scale
transformer maker for grids. It looks like it will become the
largest upstream solar materials company, supplying poly-silicon
and wafers in China. Obviously the solar industry is a bit more
cyclical, but it's another excellent company.
In the consumer sector, Midea Group (000333.CH) is our favorite.
It is the largest white goods maker in China. We are starting to
see its own-brand sales into emerging markets. It is just a
fantastic company.
Gree Electric Appliances (000651.CH) is also very cheap and is
the world's number one air-conditioner maker.
We also like liquor companies. Kweichow Moutai (600519.CH) is
the main one, but there is a whole bunch.
There are retail plays including Heilan Home (600398.CH), which
is the largest menswear brand, and Shanghai Metersbonwe
(002269.CH), which is the largest casual wear brand in China, and
Yonghui Superstores (601933.CH), which is a hypermarket. With the
popularity of the internet sector all of these have de-rated.
They've got brands and they are very good operators, but because
they are not online platforms or they have to chase online
business, they're generally not that popular. Yet quality wise, and
in terms of valuation and growth, they're fine. Also they have no
correlation with global markets, so if global markets struggle this
year, no problem!
Q: How has Beijing's crackdown on extravagant spending affected
Kweichow Moutai?
A: It got hit in the last two years, but its price has
normalized. It's still in the process of clearing inventory, but
generally it is on a bit of a comeback trail. It hasn't really
performed much in 2014, but it's nice and cheap now.
Q: What's your top pick in Hong Kong?
A: If we took the premise to buy something on January 1st and
not trade, then it would be Chow Tai Fook Jewellery Group
(1929.HK). It's a unique business as it is a fully integrated
supplier of gold and diamonds into China and the largest jewellery
retailer in China. It is doing very well in using new technology
and when you look at the stock it has done nothing for three
years.
What better business is there than selling diamonds into China?
Even if you consider urban only sales, per-capita sales of diamonds
in China are one-third of that in the US. The company has
partnerships with De Beers, the Russian suppliers, Rio Tinto ( RIO
) who all want to get their products into China.
Q: Which risks are not getting enough attention right now?
A: Interest rates. Everyone has talked about them for so long
that it is just like "yeah, yeah, we know, we know" and the markets
don't care. But the markets do care and we've done a study that
shows that markets decline two months ahead of interest rate hikes.
Two months ahead and markets are going to have a big selloff. It is
not just going to be this market, it's going to be everything. That
risk hasn't been factored in.
The selloff in global markets is probably going to occur when
people aren't really expecting it. It's the elephant in the room
and everyone is just pretending it is not there, but it is there.
We haven't experienced rate hikes for a very long time. Everyone
warned about it at the beginning of 2014 and they were wrong. So
there's a bit of a "cry wolf" syndrome.
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Email: thomas.streater@barrons.com
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