China’s SOE, tech stocks rally to strengthen as traders seek shelter from faltering economic recovery, say brokerages
- CSC Financial, Western Securities say listed state-owned firms will remain attractive because of their appealing valuations and dividend payouts
- SOEs and tech companies are among the few sectors to have thrived as China’s slow recovery from Covid-19 dashed hope of across-the-board gains in stocks
“Looking into the second half, China’s policies will focus more on the quality of growth, so the magnitude of the economic and earnings recovery will be limited,” said Deng Lijun, a strategist at Northeast Securities. “There is limited upside room for the stock benchmark, which is most likely to be rangebound.
“All the factors bolster the case that the trade in TMT [technology, media and telecoms] stocks and SOEs can carry on.”
The benchmark CSI 300 Index has risen about 3 per cent this year, with the gain spurred by the reopening of the economy fading recently. Its sub-gauge of technology stock has climbed 11 per cent and a measure of central SOEs has gained 9 per cent.
“The state-owned economy is the ballast of China’s economic and social stability and has a pillar position in the areas concerning national security and economy,” said Yi Bin, a strategist at Western Securities.
China’s SOEs, traditionally shunned by investors for their low growth potential, high debt ratios and their social responsibility burden, are enjoying their moment of glory after the stock-market regulator called for a new methodology for valuing their stock. The momentum has strengthened recently after sluggish economic growth prompted rotation into low-valuation bets and the Shanghai Stock Exchange hosted seminars to promote SOE investments.
SOEs have a total market values of 47.6 trillion yuan (US$6.8 trillion), representing half the capitalisation of China’s onshore market, according to Western Securities. They generated combined revenue of 11.3 trillion yuan in the first quarter of 2023, contributing to 66 per cent of the sales for all listed companies.
In the offshore market, insurers, Macau casino operators, brewers and railway equipment makers may stand out for the rest of the year because of a turnaround in their earnings, said Edmond Huang, a strategist at Credit Suisse Group, in a webinar on Tuesday.