The rally in Chinese commodity producers has further to run for at least one top stock picker. A gauge of raw materials shares on the MSCI Chin
The rally in Chinese commodity producers has further to run for at least one top stock picker.
A gauge of raw materials shares on the MSCI China Index has jumped 24 percent this year, the second-best performance among 10 industry groups. Mandy Chan, who manages $8 billion worth of assets in Chinese and Hong Kong equities for HSBC Global Asset Management, says improving profits, increased government spending and output cuts will support the advance by commodities and machinery makers.
Investment, property and industrial drivers are helping to boost growth across the economy, with China’s official factory gauge rising to the highest in almost five years in March. As part of the Communist Party’s objectives for the year, Premier Li Keqiang said the nation will cut 150 million metric tons of coal capacity and 50 million tons from steel output.
“As a result of strong infrastructure investment growth, we will see strong earnings turnaround in commodities and machinery makers on the back of a strong pick-up in demand and also the companies’ pricing power,” Chan, whose HSBC China Momentum Fund has beaten 97 percent of its peers over the past 12 months with a 35 percent return, said in an interview in her Hong Kong office. She declined to name specific companies.
Chan says these stocks will benefit from public-private partnerships. More than 500 billion yuan ($72 billion) of investment has been included in the central government budget this year, according to Li.”We expect a faster take up in the PPP program this year to conduct infrastructure projects,” she said.
Among other key points:
- “Our earnings forecast for some commodities producers are 20 percent to 30 percent above market consensus,” she said. “Both pricing power and demand are coming back strongly. The earnings turnaround isn’t fully in the price yet.”
- Chan said she likes chemicals, fertilizers and copper shares.
- Some investors may have underestimated the strength of metals demand in China, the pace of earnings recovery for some commodities producers and perhaps how cheap some stocks are in this sector, she said.
- Chan expects China’s economic momentum to be sustained throughout the year.
- “It will be a year when old economy shares will outperform the new economy ones,” Chan said. “Stocks we like are all related” to the recovery in producer prices.
bloomberg.com
