Chinese stocks trading in the U.S. at their cheapest level in seven weeks are spurring Russell Investments to increase holdings on prospects the nation’s new leaders will be forced to bolster the economy to retain power.
“The market is at a heavy discount relative to history,” Gustavo Galindo, whose $8 billion Russell Emerging Markets Fund (REMSX) has beaten 50 percent of its peers in the past month, said by phone in New York on Nov. 16. “China’s new party leaders have the incentive to act because they can only stay in power so long as the economy remains strong.”
The Bloomberg China-US Equity Index (CH55BN) of the most-traded Chinese shares in the U.S. retreated 3.3 percent last week as disappointing company earnings damped prospects of an economic recovery. Companies on the gauge traded at an average 13 times estimated earnings on Nov. 16, the least since Oct. 1, data compiled by Bloomberg show. New leaders named at the Communist Party congress last week inherit an economy forecast by economists to grow at the slowest pace in more than a decade.
The Russell fund has returned 8.6 percent this year, compared with a 0.5 percent decline in the China-US gauge and the Shanghai Composite Index (SHCOMP)’s 8.4 percent slump. Galindo is buying more Chinese equities after lifting holdings to 16 percent of investments in 2012, from 14.5 percent last year, he said.
The average valuation for Chinese companies in the Bloomberg gauge was 51 percent higher than the multiple for stocks on the MSCI Emerging Markets Index (MXEF), Bloomberg data show. This compares with a 27 percent premium at the end of August and a six-year average of 83 percent.
Xi Jinping, former Chinese vice president, was named general secretary of the Communist Party on Nov. 15 in the nation’s once-a-decade leadership change.
“The premium is getting large but I don’t think it’s back to where it’s always been,” Galindo said. “People had worried about the power transition and it is going pretty well. That probably will give another bump to the share prices.”
The retreat in the Bloomberg measure for U.S.-traded Chinese stocks last week exended its loss this month to 4.6 percent, after rising in the previous three months.
The Beijing-based company’s fourth-quarter revenue forecast of as little as $132 million fell short of the $152.4 million average projection of nine analysts in a Bloomberg survey before its Nov. 15 statement.
At least 10 analysts who have updated their recommendations since Sina’s report slashed their price estimates for the stock, including Hong Kong-based Piyush Mubayi at Goldman Sachs Group Inc.
“Sina’s shares will bounce back once the economic growth rebounds,” Tian X. Hou, the founder of T.H. Capital LLC, said in by phone from Beijing on Nov. 16. “Sina’s Weibo has become a powerful media that the government used it for party congress broadcasting, and ordinary people are using it to follow news. It’s been integrated into people’s life.”
Trina Solar Ltd. (TSL), China’s third-largest solar maker, sank 36 percent last week, leading a slump in peers, and was the biggest decliner on the Bloomberg index. Its American depositary receipts dropped to a record low of $2.32.
The Guangzhou-based company cut its estimate for third- quarter shipments on Nov. 12 by 20 percent to as much as 385 megawatts, citing a supply-demand imbalance and “irrational pricing practices” by competitors. Trina is scheduled to release third-quarter results tomorrow.
LDK Solar Co., the world’s second-largest maker of wafers, and JA Solar Holdings Co., China’s largest solar-cell maker, said they will take steps to boost the value of its ADRs after prices below listing requirements drew warnings from U.S. stock exchanges.
LDK ended the week little changed to 91 cents after a four- day slump. Its bigger competitor Suntech lost 15 percent last week to 77 cents. Shanghai-based JA plunged 10 percent on Nov. 16 to 63 cents, adding to a weekly loss of 16 percent.
21Vianet Group Inc. (VNET), an Internet-data center service provider, plunged 11 percent last week, the most in three months.
Beijing-based 21Vianet projected sales for the fourth quarter to be between 413 million yuan ($66.2 million) and 420 million yuan, lower than the 427.2 million mean analyst estimate compiled by Bloomberg before its Nov. 16 announcement.
The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., retreated 1.9 percent last week to $35.77. The Standard & Poor’s 500 Index slid 1.4 percent for the week to 1,359.88 on Nov. 16.
China’s Shanghai Composite Index of domestic shares sank 2.6 percent last week to 2,014.73, the lowest since Sept. 26, while the CSI 300 Index (SHSZ300), representing the biggest companies in the Shanghai and Shenzhen exchanges, dropped to the lowest level since March 2009. The Hang Seng China Enterprises Index (HSCEI) of companies traded in Hong Kong retreated 2 percent to 100,242.7.
“The top priority of the new leaders is to return some of the economic interest to the grassroots,” T.H. Capital’s Hou said. “The only path they can choose is to use economic growth to calm down social conflicts that have accumulated over the years, giving themselves some time to initiate political reforms.”
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