Credence Oriental Trade Enterprise Ltd., a China hedge fund that has beaten 98 percent of its rivals, will boost its Chinese stock holdings on the prospect of economic expansion and increased equity purchases by foreigners.
Credence is increasing the percentage of yuan-denominated A shares and Hong Kong-listed H shares it holds in its portfolio to 70 percent from 50 percent, while reducing bets on commodities, Tom Tang, co-manager of the China-domiciled fund, said in a phone interview from Hong Kong on April 4. Credence, which has 211 million yuan ($33.6 million) in assets, has returned 29 percent in the past three years, outperforming 1,203 China-focused funds, according to data compiled by Bloomberg.
“Equities will be our major investment in the future,” said Tang, 39, who is based in Shenzhen. “There’s less variety in commodities and we want a more diversified portfolio.”
The Shanghai Composite Index has risen 4.9 percent this year on speculation the government will ease monetary policies and take measures to prevent stocks from slumping for a third year. The China Securities Regulatory Commission announced on April 3 that it increased quotas for qualified foreign institutional investors to $80 billion from $30 billion, spurring the biggest gains for the benchmark measure in three weeks. The index rose 0.2 percent to 2,306.55 at the close.
“This is good news for the stock market,” said Tang. “It will increase trading of blue-chip stocks and improve valuations.”
The Shanghai Composite trades at 9.7 times estimated earnings, compared with an average multiple of 18.4 over the past five years, according to weekly data compiled by Bloomberg.
Tang said the Chinese economy won’t have a so-called hard landing and earnings will improve because the the government has scope to support the expansion if growth slows too much.
Premier Wen Jiabao said on March 5 that the government is targeting a 7.5 percent economic growth rate this year, after keeping the goal at 8 percent over the last seven years. The Chinese economy probably expanded 8.4 percent in the first three months of the year, according to the median estimate of 38 economists surveyed by Bloomberg. The figure is due April 13.
The 573 companies in the Shanghai index that have published annual earnings reported growth of 15 percent on average, trailing analyst estimates by 1.6 percent, Bloomberg data show.
“I am still positive on this year’s earnings outlook compared to last year,” Tang said. “With regards to the macroeconomy, the government still has quite strong control over it. The economy is still resilient.”
Tang’s comments contrast with JPMorgan Chase & Co. strategist Adrian Mowat who said last month the nation is already in a hard landing. Societe Generale SA said in a March 27 report Chinese corporate profits won’t grow at all this year.
Sinopec Top Pick
The S&P GSCI Spot Index of 24 raw materials gained 6.6 percent this year, while the Hang Seng China Enterprises Index of Hong Kong-listed Chinese stocks jumped 8.1 percent. Goldman Sachs Group Inc. on March 28 cut its three-month outlook on commodities to neutral from overweight, saying that most raw materials reached their targets and global economic growth may soften in the next quarter.
Credence favors banks and resource stocks because they have higher quality companies whose businesses are more diversified, Tang said. Resource stocks will benefit from increasing demand from the so-called BRIC nations of Brazil, Russia, India and China, he said.
Tang said China Petroleum & Chemical Corp., known as Sinopec, is a top pick because of its diverse businesses and “stable operating model.” Sinopec said last week it would ramp up crude production and develop natural gas fields to counter losses from selling diesel and gasoline at state-fixed prices.
“I like the company because the business will not be affected adversely by any one single factor,” said Tang. “It’s more stable this way.”