SHANGHAI (Reuters) - Chinese cyclical stocks should see a rapid recovery in valuations as investors, betting on economic revival, move into sectors such as banking and construction and out of expensive tech shares, an executive of Warburg Pincus’ China mutual fund venture said.
Li Huiyong, vice general manager of Hwabao WP Fund Management Co, said China’s economic rebound will push up interest rates next year, but foreign money inflows and domestic asset re-allocation could help to offset any reduction in market liquidity.
“As China’s economy shakes off the epidemic, cyclicals will witness a jump in earnings. But lofty valuations of tech shares need validation from good performance, which takes time,” Li told Reuters in an interview in Shanghai, as part of the Reuters Global Investment Outlook Summit, 2021.
Li, who is a trained economist, said the migration of money was ongoing and, if history is any guide, the valuation of cyclical stocks would “heal very rapidly”.
China’s Nasdaq-style STAR Market has jumped more than 40% so far this year, while the blue-chip CSI300 Index has gained 24%. Since the start of the fourth quarter, CSI300 has outperformed STAR, reflecting a shift in investor preference.
Li forecast that China’s interest rates would rise, as an expected 8.5% annual GDP growth next year will boost demand for liquidity. Beijing will avoid flooding the economy with excessive credit, but Li foresees other sources of liquidity.
“Global capital, which chases profit, will increase allocation to emerging markets, especially China,” where the pandemic is under control, and the economy rebounding, Li said. “The trend of foreign inflows will only strengthen.”
Li’s view is shared by global fund managers, who see China’s stocks bull run lasting well into 2021.
Li also sees a “perfect match” between higher-quality assets, and more long-term capital in China, as regulators speed up listings and guide money into stocks through a crackdown on shadow banking and real estate speculation.
Over the next three months, investors should buy risky assets, including stocks and commodities, as China’s economy is expected to jump 20% in the first quarter of next year from a very low base, he said.
The sectors he favours include banking, insurance, construction, autos, chemicals and non-ferrous metals.
Over the long term, investors should hold leading stocks in sectors that represent China’s future, such as consumption, technology and environmental protection, said Li.
Reporting by Samuel Shen and Andrew Galbraith; editing by Barbara Lewis
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