China’s Top Fund Manager Sees Stock Gains on Growth Policy
China’s best-performing fund manager says the government’s pro-growth policies and pledge to compel state-owned companies to increase dividend yields will boost the nation’s stocks in the second half of the year.
Yinhua Fund Management Co.’s Wang Qi said he has turned optimistic on yuan-denominated shares, on prospects for further monetary policy easing after April data signaled a deepening slowdown in the world’s second-biggest economy. His outlook is a change from mid-2011, when he said in the fund’s semi-annual report that stocks would trade “range-bound,” and comes as the government said this month during economic talks with the U.S. that state-owned firms will lift dividend payout ratios.
“The stock market is at the bottom now and may rise with monetary policies being eased,” Wang said in an e-mailed interview from Beijing yesterday, declining to give a target for equities. “If mandatory rules on dividend payments can be implemented, we’ll be able to see shares with high dividend yields and that’ll make stock investment attractive.”
Wang’s Yinhua CSI Equal Weight 90 Xinli Fund (150031), with assets of 3.82 billion yuan ($603 million) in the first quarter, returned 33 percent this year, ranking first among 693 mutual funds in its peer group, data compiled by Bloomberg show.
The Shanghai Composite Index (SHCOMP) fell 0.7 percent to 2,333.55 at the close and is down 5.2 percent from this year’s high set on March 2 on concern a slowdown in the Chinese economy is accelerating. A report from HSBC Holdings Plc and Markit Economics yesterday showed a preliminary reading of 48.7 for their purchasing managers’ index, indicating China’s manufacturing may shrink for a seventh month in May.
Stocks in the Shanghai gauge, which has risen 6.1 percent this year, are valued at 10.1 times estimated earnings, compared with the five-year average multiple of 18, according to weekly data compiled by Bloomberg. The MSCI Emerging-Markets Index (MXEF) trades at 9.7 times profit.
“We have turned optimistic about the A-share market this year because valuations are already at relatively low levels and the government has the ability to deliver steady economic growth and maintain economic stability,” Wang said.
In his fund’s semi-annual report last year, Wang said China’s stocks would be “range-bound” in the second half of 2011 because of liquidity and earnings concerns. The Shanghai Composite dropped 20 percent during that period. Wang’s new outlook is shared by Morgan Stanley Huaxin Securities and Guotai Junan Securities Co., which have said China’s longest bear market since 2005 is set to end as government efforts to bolster the economy spur a rally in stocks.
Wang’s top holdings in the first three months of this year included rare earth producers Inner Mongolia Baotou Steel Rare- Earth Hi-Tech Co. and Inner Mongolian Baotou Steel Union Co., according to the fund’s quarterly report. Rare-Earth Hi-Tech has jumped 131 percent this year. Steel Union rose 50 percent.
Premier Wen Jiabao said the government will focus more on bolstering economic growth, the official Xinhua News Agency reported May 20, without saying what measures may be introduced. China will start a series of “key infrastructure projects that are vital to the overall economy and can facilitate growth” and speed up construction of railway, environmental protection and rural projects, the government said on its website on May 23.
The central bank has lowered banks’ reserve-requirement ratios three times since November to spur lending to small companies. An interest-rate cut can’t be ruled out if data for May indicate a further slowdown in growth, the China Securities Journal reported May 23, citing unidentified people. Borrowing costs haven’t been reduced since 2008.
Morgan Stanley, Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp. and UBS AG pared their 2012 economic growth forecasts for China this month after April data showed industrial output climbed at the slowest pace since 2009 and new yuan loans missed estimates. Inflation rose 3.4 percent in April, the third month that it was below the government’s annual target of 4 percent.
“Pro-growth policies will stand until inflation comes back,” said Wang, who worked as an investment manager for China Construction Bank Corp. (939) before joining Yinhua Fund in 2010. He holds a doctorate from the post-graduate department of the People’s Bank of China.
China’s full-year growth may be below 7 percent unless the government introduces more stimulus measures, the Wall Street Journal reported on its Chinese-language website on May 23, citing Chen Dongqi, the deputy head of the National Development and Reform Commission’s macroeconomic research institute. The government is targeting 7.5 percent growth this year.
Deutsche Bank AG is recommending investors hold fewer Chinese shares than are represented in benchmark indexes because the economy is undergoing a “messy transition.” While the nation’s equities appear cheap and may rebound in the “short term,” industrial overcapacity may hurt corporate earnings, John-Paul Smith, Deutsche Bank’s London-based emerging-market strategist, wrote in a May 15 report.
Higher dividend yields are “crucial” in boosting interest in the stock market, Wang said. Guo Shuqing, who was named as chairman of the China Securities Regulatory Commission in October, is keen on reversing the Shanghai Composite’s combined 33 percent loss in 2010 and 2011 by taking measures to bolster stock demand and compelling companies to pay more dividends.
The nation’s corporate dividends are the lowest among the world’s 10 largest markets, according to data compiled by Bloomberg. The dividend yield on the Shanghai Composite, or cash companies pay to shareholders as a percentage of stock prices, is 2.04 percent, according to data compiled by Bloomberg. That compares with an average of 3.10 percent for companies on the MSCI Emerging-Markets Index.
The government agreed in a May 4 joint statement with the U.S. to “steadily” boost the dividend payout ratio of state- owned companies. The CSRC will also “guide” publicly traded companies in setting sustainable and transparent dividend payment policies, the Securities Times reported on March 23, citing Guo.
Gauges of telecommunications, utility, technology and healthcare stocks in the CSI 300 have the lowest dividend yields of 10 industry groups, with returns of not more than 2.6 percent, according to data compiled by Bloomberg.
The four indexes are the worst performing in the CSI 300 in 2012 with gains of not more than 3 percent, compared with 11 percent for the broader index. Banks pay the most dividends with the 14 lenders in the Shanghai Composite offering an average yield of 4.21 percent, the data show.
“The implementation of these policies is crucial to the development of the stock market in the medium and long term,” said Wang. “It’ll lead to a new run-up for stocks.”
--Zhang Shidong. Editor: Allen Wan, Darren Boey.
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