Stifel Lured by Cheap Stocks on Economy: China Overnight

Stifel Lured by Cheap Stocks as Outlook Revives
Confidence in China’s economy is at the highest level in more than a year on optimism the nation’s new incoming leaders will provide a boost to the financial climate. Photographer: Tomohiro Ohsumi/Bloomberg

Chinese stocks in the U.S. are trading at the smallest premium to emerging-market equities in two months after slumping in November, a signal to Stifel Nicolaus & Co. that they will rebound as the economy recovers.

The Bloomberg China-US Equity Index of the most-traded Chinese shares in New York lost 1.2 percent in November, sliding for the first time in four months, while the MSCI Emerging-Markets Index climbed the same amount. The China-US gauge traded for 15.7 times estimated profit on Nov. 27, a 37 percent premium to the MSCI measure and the smallest advantage since Sept. 27, data compiled by Bloomberg show.

“The fact that Chinese stocks have been lagging the emerging-market rally makes them more attractive than a lot of the emerging markets,” Dave Lutz, head of exchange-traded fund trading and strategy at Stifel Nicolaus & Co., said Nov. 30 by phone from Baltimore. “There’s the possibility of a rally this month if the Chinese economy is picking up, as many think. If we continue to see a pickup in economic data out of China, sooner or later these stocks will reflect their valuation.”

China’s purchasing managers’ index rose to the highest level in seven months in November, the China Federation of Logistics and Purchasing and the National Bureau of Statistics said on Dec. 1. The index was 50.6 last month, compared with

50.2 in October and the 50.8 median of 28 analysts’ estimates. A reading above 50 indicates expansion.

Growing Confidence

The data adds to signs China is emerging from its seven-quarter slowdown, after factory production and retail sales picked up and inflation slowed. Confidence in China’s economy is at the highest level in more than a year on optimism the nation’s new incoming leaders will provide a boost to the financial climate, according to a Bloomberg investor poll.

The iShares FTSE China 25 Index Fund, the biggest Chinese exchange-traded fund in the U.S., gained 0.8 percent to $37.15 on Nov. 30, leaving the ETF up 1 percent for November. The Standard & Poor’s 500 Index was little changed at 1,416.18 for a monthly advance of 0.3 percent, as lawmakers negotiated over the U.S. federal budget.

The Bloomberg China-U.S. index added 0.6 percent on Nov. 30 to 92.81, trimming the weekly decline to 0.9 percent.

New Oriental Education & Technology Group surged 20 percent in November, the best performance in three months, as Carson Block, short seller and founder of research firm Muddy Waters LLC, which queried New Oriental’s units’ accounting in July, said last week that it’s now too hard to short Chinese U.S.- listed stocks. The company’s American depositary receipts climbed to a four-month high of $20.96 on Nov. 29.

Block Retreats

Block said he lost interest in betting against Chinese stocks and speculated that the government is protecting fraudulent companies in an interview on Bloomberg Television Nov. 27.

Hedge funds refraining from shorting Chinese stocks may also boost the market this month, according to Stifel’s Lutz. “A lot of hedge funds are probably trying to cover their China shorts in overseas markets they can short to begin with,” he said.

Huaneng Power International Inc., China’s biggest electricity producer, climbed 3.3 percent to $34.09 in New York on Nov. 30, the highest closing price since September 2008. The benchmark Chinese price index for coal used in power stations slid 0.2 percent from a week earlier, according to the Qinhuangdao Seaborne Coal Market website.

Huaneng’s ADRs, each representing 40 underlying shares in the company, traded 0.5 percent above its Hong Kong stock, the widest premium since Oct. 16.

Solar Rally

Yingli Green Energy Holding Co. surged 4.7 percent to $1.80 on Nov. 30, capping a 40 percent weekly rally that was the most among solar companies. Trading volumes were almost three times the daily average over the past three months. Chief Executive Officer Miao Liansheng said Nov. 28 he expects that the manufacturer will be the world’s biggest panel supplier this year.

Youku Tudou Inc., owner of China’s most popular video websites, gained 1.1 percent Nov. 30 to $17.06 as it reported third-quarter revenue that beat analysts’ estimates. Sales almost doubled to $79.9 million, beating the $73 million projected by six analysts surveyed by Bloomberg.

Youku, which acquired Tudou Holdings Ltd. in March, said it achieved operating profitability for the first time in its history and announced that the company will begin to monetize its mobile traffic next year.

“This indicates that if it can make profit on a smaller scale, the combined company will also become profitable as the merger’s benefits take effect gradually,” Tian X. Hou, the founder of T.H. Capital LLC, said in by phone from Beijing. “The merged company can reach more audience and set higher prices for advertisers.”

Qihoo Competition

Baidu Inc., owner of China’s most popular search engine, dropped 2.7 percent Nov. 30 to $96.31 as smaller rival Qihoo 360 Technology Co. Ltd. said its share of the Chinese Internet market had grown to 10 percent, according to a report in the Wall Street Journal. Baidu’s decline added to a monthly drop of

9.8 percent, the steepest since May.

Government figures due this weekend may also show November industrial production and retail sales rose at the fastest pace in eight months. China’s Commerce Minister Chen Deming said he sees no issues with the nation reaching its 2012 economic growth goal of 7.5 percent at a Nov. 28 financial forum in Beijing. The economy grew 7.4 percent in the third quarter, the slowest pace since the first three months of 2009.

‘Valuation and Growth’

“Chinese stocks are still pricing in an economic hard landing, while I don’t think there will be a hard landing,” Arjun Jayaraman, who helps manage investments in emerging-market equities at Causeway Capital Management LLC, which has $15 billion under management, said by phone Nov. 30 from Los Angeles. “There are other emerging markets that are very cheap, but none of them are growing at more than 6 percent growth rate like China. So you get a decent mix of valuation and growth in China.”

The Hang Seng China Enterprises Index rallied 1.3 percent on Nov. 30 to gain 0.4 percent in November, while the Shanghai Composite Index climbed for the first time in five days, adding

0.9 percent. The gauge of domestic Chinese stocks lost 4.3 percent last month.

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