JP Morgan Asset Management sees an opportunity to recapture ground lost in Greater China stocks last year, with Chinese equities trading below valuation levels seen during the global financial crisis, even as earnings revisions have remained stable.
In terms of its positioning, the asset manager is overweighting Chinese banks and consumption plays, Macau gaming and Taiwanese petrochemicals and semiconductors, while it has cut property and financial holdings in both Hong Kong and Taiwan.
Fears that China’s deteriorating property sector would cause a plethora of bad loans and add to the credit risk of local government funding platforms have dragged down banking stocks.
But Howard Wang, head of JP Morgan AM’s Greater China team, plays down such concerns, noting that negative expectations over property purchases has already been priced into equities, while regulators have increased scrutiny of local government funding platforms, bringing them back onto the central government’s balance sheet. “You could potentially get some sovereign systematic risk in China, but this tail-end event is not likely to happen,” he adds.
Wang goes further and talks about his optimism for China’s banking sector. “First, the non-performing loan balance has been falling, and the loan loss reserve coverage is ample,” he states. “We think Chinese banks will weather this uncertain period given their improving NPLs and sufficient capital.”
He points out that over the first three quarters of last year Chinese banks had already realised 80% of their full-year earnings estimate, and notes the very real prospect of earnings-per-share upgrades, especially since analysts have become more negative for 2012.
Wang expects a gradual normalisation in the share prices of Chinese banks, which he argues have become too depressed with valuation levels having fallen below 2008 crisis levels.
With inflation easing, Wang also expects margin normalisation among Chinese consumer companies which he says have been defying a slowing environment by delivering persistent strength in both same-store sales and free cash-flow yield.
Goldman Sachs, for instance, estimates the same-store sales growth of Prada to be 24.3% this year and its free cash-flow yield to be a healthy 4.2%.
JP Morgan AM also quotes consensus numbers for consumer staples company Want Want, which is expected to grow sales by 22% in 2012.
But Wang strikes a cautious note on the Hong Kong front. “Interest rates have troughed and investor sentiment towards properties and banks is likely to be capped,” he notes, while counterbalancing that with the thought: “Hong Kong retailers remain blessed with China consumption.”
Given that Taiwan is home to a plethora of technology firms that are suppliers for smartphone and iPad, Wang notes it is easy to put together a technology portfolio within a Greater China fund.
However, he adds: “Expectations on smartphone-related supply chain companies have come down and a couple of earnings downgrades are a distinct probability.”