Li’s Urban Planning Sends Invesco Into Machinery Stocks
China’s move to develop urban areas is luring Invesco Great Wall Fund Management Co. and Harvest Fund Management Co. to industrial stocks that are trading at an 11 percent premium to the benchmark index.
Yu Guang, who manages the $350 million Invesco Great Wall Energy fund, and Zhang Tao, who oversees the $480 million Harvest Research Selective Equity fund, are buying construction machinery stocks and railway companies. Shi Wei, who oversees the $302 million Bank of Communications Schroder Pioneer Fund, said cement companies will benefit from urbanization. Their funds beat at least 92 percent of rivals in the past 12 months, data compiled by Bloomberg show.
A gauge of industrial companies in the CSI 300 Index (SHSZ300) had rallied 20 percent since Dec. 4, trailing the 22 percent advance in the benchmark measure, when the official Xinhua News Agency cited the nation’s new leaders as saying they would promote urban development. Urbanization is a “huge engine” of China’s future growth, Li Keqiang, poised to succeed Wen Jiabao as premier in March, wrote in a full-page article in the People’s Daily on Nov. 21.
“There are a lot of expectations for reforms and urbanization,” Invesco’s Yu said by phone yesterday. “I am optimistic about China’s stocks.”
Li is among a new generation of Chinese leaders headed by Xi Jinping that is due to take power in two months. Urbanization is expected to spur 40 trillion yuan ($6.4 trillion) of investment by 2020, the Southern Metropolis Daily reported Dec. 25, citing a draft plan by the National Development and Reform Commission, the nation’s top economic planner.
A gauge of 60 industrial companies in the CSI 300, which includes rail stocks, traded at 15.6 times reported earnings on Jan. 3, the highest level since August 2011, data compiled by Bloomberg show. The ratio was at 14.4 yesterday, while the average multiple for companies on the CSI 300 was at 13.02.
Yu said investors should buy construction machinery and railway-related companies as urban development will require improvements in transport systems and lead to increased rail demand. The fund manager, based in the southern Chinese city of Shenzhen, declined to name specific stocks he was buying.
China Railway Group Ltd. (601390) and China Railway Construction Corp., the nation’s two biggest rail and metro line builders, have surged at least 29 percent in Shanghai trading in the past three months. China Railway trades at 10.6 times estimated profit, while Railway Construction’s trades at a multiple of 9.7, according to data compiled by Bloomberg.
China will support the development of environmentally friendly urban transport systems and offer tax breaks and fuel subsidies for mass transit vehicles, according to a statement by the State Council, or cabinet, on Jan. 5. Li called on Chinese citizens yesterday to have patience as authorities work to reduce record levels of pollution in Beijing.
Sany Heavy Industry Co. (600031), China’s biggest machinery maker, has rallied 36 percent since Dec. 3, when valuations hit a record low of 8.5 times profit. It now trades at a multiple of 11.5, according to data compiled by Bloomberg.
“Production, construction, consumption cannot come at the price of hurting the environment,” Li said in comments broadcast by state radio yesterday.
Industrial shares have also benefited from a rally in Chinese stocks amid signs of a pick-up in the economy. Data released on Jan. 10 showed exports rose more than forecast last month, while a broad measure of credit surged 28 percent. Gross domestic product may grow 8.1 percent this year after expanding an estimated 7.7 percent in 2012, the slowest pace since 1999, according to a Bloomberg survey of economists.
The CSI 300, which tracks yuan-denominated A shares in Shanghai and Shenzhen, rallied from the lowest level in almost four years on Dec. 3. The benchmark Shanghai Composite Index (SHCOMP), which rose 3.2 percent last year, had climbed 19 percent since last month’s nadir. The Shanghai gauge dropped 0.8 percent to close at 2,306.73 today.
“I am more optimistic about A shares” this year, Harvest’s Zhang said by phone yesterday. “There may be opportunities in industries with government-led initiatives, such as railway and construction machinery.”
Investors should avoid construction machinery companies as China’s new leaders will seek to focus the economy on growth driven by consumer spending rather than fixed-asset investment, Julian Bu, head of China industrials at Jefferies Group Inc. in Hong Kong, wrote in a Jan. 14 report. Auto stocks are a better investment as consumption growth will accelerate, Bu wrote.
A measure of consumer-discretionary companies in the CSI 300 Index, which includes automakers, has risen 3.1 percent this year. It climbed 7.2 percent in 2012, the third-best performance of 10 industry groups. The gauge trades for 11.6 times estimated profit, compared with a five-year average of 18.4.
“I’m not sure this phase of urbanization is necessarily about massive infrastructure growth,” Matthew Sutherland, senior investment director for equities at Fidelity Worldwide Investment, said in a Jan. 9 interview from Hong Kong. “It’s more about social changes, a social safety net to encourage people living in the cities to spend more.”
As many as 300 million people will move from the countryside by 2030, to join 600 million already living in cities, the Organization for Economic Cooperation and Development estimates. Urban development should add more consumers to urban areas in China, which will require more infrastructure, services and other consumer goods, according to a Barclays Plc report dated Jan. 4.
The government’s plan to move more people to cities and improve public transport “will boost investment and consumption greatly,” BoCom’s Shi said in a phone interview today from Shanghai. “The cement, machinery and property sectors will benefit.”
Anhui Conch Cement Co., China’s largest producer of the building material, had rallied 18 percent in the past two months. It traded at 15.9 times reported profit on Jan. 7, the highest level since June 2011.
Harvest’s Zhang is looking to the annual meeting of the nation’s legislature in March for economic targets and more specifics on the new leadership’s urban development policies. China will boost rural incomes and public services to help narrow the divide with urban areas, the official Xinhua News Agency reported on Dec. 22.
“There’s a high chance the economy will bottom and the leadership transfer would have been completed,” Harvest’s Zhang said. Stocks “will do better” this year than in 2012, he said.
To contact the editor responsible for this story: Darren Boey at firstname.lastname@example.org