Hermes Buys China Mainland Shares on Economic OutlookYe Xie
Hermes Fund Managers Ltd., which beat 88 percent of its emerging-market peers this year, is boosting holdings of Chinese stocks after the government pledged to open up the economy to more investment to fuel growth.
Hermes has added shares of companies traded on mainland bourses, including Kweichow Moutai Co., Gree Electric Appliances Inc., Huayu Automotive Systems Co. and Daqin Railway Co., the London-based asset manager said. The Bloomberg China-US Equity Index of the most-traded Chinese shares in New York has gained 5 percent since the government announced the reforms on Nov. 15. The measure fell 0.4 percent yesterday to 107.67. The Shanghai Composite Index of mainland-listed equities dropped 0.4 percent to 2,237.81 at 10:21 a.m. local time.
China vowed last month to allow more private investment in state-controlled industries and loosen its one-child policy in the most sweeping reforms in two decades. The Hang Seng China AH Premium Index showed that the mainland shares were valued at a discount to their Hong Kong equivalents, signaling foreign investors are more optimistic about the growth outlook than locals.
“Reforms should imply somewhat slower, but better-quality and more sustainable growth,” Gary Greenberg, who oversees about $800 million emerging-market stocks at Hermes, said in a phone interview from London yesterday. “The market is priced as if the Chinese growth is not sustained and a crisis will come. We are on the positive side of the debate.”
The Hang Seng China Enterprises Index, which tracks so-called H shares traded in Hong Kong, jumped 9.7 percent since the economic reforms were announced through yesterday, while the Shanghai Composite gained 7 percent.
Even after the rally, the benchmark for stocks in mainland China traded at 11 times trailing earnings, compared with a multiple of 49 in October 2007. The ratio for the H-share index dropped to 8.5 times profit from 22 in 2009.
Greenberg said Chinese stocks have a “reasonable overweight” in his portfolio.
The $343 million Hermes Global Emerging Markets Fund has gained 7.8 percent this year, compared with a decline of 5.4 percent in the benchmark measure for developing nations, according to data compiled by Bloomberg.
President Xi Jinping is trying to sustain long-term expansion while overcoming risks from rising debt and pressures on government-backed companies. The reforms will add less than half a percentage point to annual growth this decade, according to 74 percent of 19 economists in a Bloomberg News survey conducted Nov. 22-27.
Economists estimate gross domestic product will expand 7.5 percent in 2014 after growing 7.6 percent this year, according to the median projection in Bloomberg News surveys. That compared with a 10 percent average growth rate in the last decade.
Yuan-denominated mainland stocks, known as A shares, traded at a 4 percent discount to their equivalent equities in Hong Kong yesterday, compared with an average premium of 2.1 percent over the past year, the Hang Seng China AH Premium Index shows.
Goldman Sachs Group Inc. this week recommended buying the nation’s shares listed in Hong Kong, while selling copper as one of its top trades for 2014. Morgan Stanley also cited H shares among its key investment ideas for next year.
Kweichow Moutai, a high-end liquor maker, has declined 34 percent this year as of yesterday, as the government’s crackdown on extravagant spending and banquets of state officials dimmed the sales outlook. The shares traded at 10 times its trailing earnings, compared with 100 times in December 2007, according to data compiled by Bloomberg. The stock advanced 1.4 percent today.
Investors have “overreacted,” and the company’s earnings will grow by 15 percent a year, Hermes said in a statement.
Daqin Railway, which provides coal transportation service in Northern China, is set to benefit from the railway reform and expectations of a cargo tariff increase in 2014, Hermes said. The shares have gained 17 percent this year as of yesterday, trading at 9.5 times earnings, data compiled by Bloomberg show. The stock lost 1.4 percent today.
The iShares China Large-Cap ETF, the largest Chinese exchange-traded fund in the U.S., fell 0.6 percent yesterday to $39.40. The Standard & Poor’s 500 Index retreated 0.4 percent after improving economic data spurred speculation the Federal Reserve will curb its monthly bond purchases sooner than estimated.
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