PICC AM pinpoints selected Hong Kong stocks and sectors to favour

China’s state-owned life insurer PICC’s asset management arm in Hong Kong thinks selected local stocks can still deliver absolute returns for Chinese life insurance companies amid global inflation and the country’s Covid-zero policy.

Opportunities lie in three main themes – high-dividend telecom operators and traditional energy producers; companies with good or improved fundamentals, including banks and consumer goods companies with strong pricing power; and quality internet companies supported by eased policies, a senior PICC Asset Management (Hong Kong) executive said during a recent discussion of the Hong Kong's market prospects.

The firm is responsible for managing PICC’s non-Renminbi assets, channelling cross-border investments from and to China, and fulfilling the insurance group’s overseas investment for diversification.

It thinks recent policies and the softer tone of Chinese officials in recent meetings are reducing the pressure of regulatory overhaul in the real estate and internet sectors, which has been a major negative factor suppressing Hong Kong stock performance.

China’s regulatory crackdown in various sectors and a slowing economy led to Hong Kong stocks being among the world’s worst performers in 2021, with the Hang Seng Index losing 14% and the Hang Seng Tech Index slumping 32.7%. This has continued into this year - the two major indices have plummeted another 12.5% and 26.3% respectively.

WEAKENING NEGATIVITY

Some Chinese cities, including Beijing and Shanghai are still struggling with an Omicron outbreak, but PICC in Hong Kong is relatively positive about the second half of 2022 as it believes the mass setup of testing booths in major cities and a higher vaccination rate will bring Covid-19 gradually under control.

“Although we are not sure about how long it takes (before it gets under control), we think the bottom (of stock price) is already known,” said Wang Zhuojun, director for equity investment of PICC Asset Management (Hong Kong), during an online roadshow for Chinese life insurance companies organised by the Insurance Asset Management Association of China (IAMAC) last week.

The other global uncertainty for Hong Kong stocks is inflation, which could put performance under pressure for a longer term, leaving opportunities for firms with strong pricing power, Wang added.

Wang said her firm has been overweighting telecom operators and energy producers since early 2021 as their low-risk and high-dividend nature serve as good alternatives for Chinese life insurance companies that used to rely on high-yield real estate bonds.  

The dividend yields in Hong Kong of the main telecom operators, such as China Mobile and China Telecom, are 40% to 50% higher than those of A shares, despite their dual listings in both Hong Kong and Chinese mainland. This is because H share investors are mainly from offshore, leading to more losses for Hong Kong shares when the US imposed sanctions on them, which provides investors a good opportunity to build positions, Wang said.

“For life insurance companies like us…No matter from a perspective of dividend, company fundamentals, or US sanctions, the downside risk has gone. So, we are very positive about the sector,” Wang told the webinar.

As ESG becomes a major initiative for many investors globally, Wang also noted the restrictions on foreign investors putting money into oil and gas producers. Meanwhile, she expects the surge in energy prices to persist for a long time until productivity of new energy picks up or traditional energy producers improve cash flow and boost productivity in the medium to long term.

“Stocks such as China Shenhua Energy and China National Offshore Oil Corporation (CNOOC) that overseas investors can’t buy could present a good opportunity for Chinese life insurance companies,” Wang said.

GOING LOCAL

The firm is also positive about how local firms such as Hong Kong banks are performing. 

Compared to onshore banks that are operating under a lengthy cycle of narrowing interest rate spreads, Hong Kong banks will benefit from the city's economic recovery post-Omicron, and the rate hike cycle of the US, making them good assets on the local bourse, Wang said.

In the consumer sector, she is betting on dominant companies, including milk and beer industry, as their fundamentals are recovering as the Covid-19 outbreak eases. These companies, such as Mengniu Dairy, Yili Group, Tsingtao Brewery, and China Resources Beer, all have quite strong pricing power to pass on the costs of inflation to consumers, she pointed out.

As Chinese authorities have softened their tone on regulatory crackdowns in the internet sector and platform economy during recent meetings of the Central Political Bureau of the Communist Party of China, the firm is also watching some leading names in the sector.

For example, Pinduoduo's revenue growth rate has decreased substantially while its profit is climbing as the firm reduced costs, Wang said.

“Therefore, we believe that the core values and barriers of internet platforms are still very strong. As their business begins to shrink capital investment, and income slows down, but profits increase significantly, it will be very supportive for their valuation and stock price performance,” Wang said.