Hong Liang remains optimistic about China even when many American hedge fund managers on Wall Street remain as bearish as ever on the Middle Kingdom. The head of research at brokerage China International Capital Corp. (CICC) thinks global fund managers shouldn’t underestimate China’s ability to propel itself forward to sustainable growth.
“China is set to grow more than 8 percent year-on-year in nominal terms” in 2016, predicts Liang, calling for the world’s second-largest economy, with some $11 trillion in gross domestic product, to far outpace its 6.4 percent year-over-year expansion in 2015.
“Faster nominal growth indicates improved corporate cash flow and investment returns this year,” she says. “This to us may be a more relevant indicator than real GDP, which appears very stable lately. Furthermore, faster nominal growth and improved corporate cash flow indicate slower inherent nonperforming loan formation this year, which is crucial for investors in China.”
Liang’s prognosis is based on 20-plus years as an economist and equity analyst, including more than a decade at Goldman Sachs Group and the International Monetary Fund. Global fund managers appreciate her upbeat assessment, voting her team No. 1 on Institutional Investor’s All-China Research Team ranking for the fifth year in a row.
CICC keeps the top spot with 25 team positions, five of them first place. The firm leads a roster of global brokerages: UBS is No. 2, with 19 team positions; Credit Suisse claims third place, with 17; Bank of America Merrill Lynch finishes fourth, with 13; and Citi rounds out the top five, with 11.
The 2016 All-China Research Team reflects the views of almost 1,150 investment professionals at some 470 institutions managing an estimated total of $647 billion in Chinese equities. We determined the ranking strictly by numeric score, with the votes awarded to each analyst weighted based on the size of the institution responding. Brokerages were ranked by their total number of analysts who placed first, second, third, or fourth in 19 industrial sectors and three macroeconomic disciplines.
Yankun Hou, head of research for China equity at UBS, sees one positive trend that will separate China from other emerging markets: its vast and growing number of middle-class consumers, those who earn between $9,000 and $34,000 annually on a purchasing power parity basis. This group comprised 68 percent of the nation’s roughly 1.3 billion people in 2012, consulting firm McKinsey & Co. estimates.
“Associated with this are fast increases in demand for higher-quality goods and services,” says Hou, the top-ranked analyst covering Autos & Auto Parts. “Expanding service sectors in turn have taken care of employment and thus helped to fuel consumption growth. These are the areas we are advising clients to look into, such as producers with better brands and strong service providers in a variety of areas, such as travel, entertainment, and mobile Internet.”
Credit Suisse’s Kam Chung (Kenneth) Fong, the first-place analyst covering Gaming, Lodging & Leisure, asserts that his sector remains a bright spot despite China’s slowdown from the double-digit growth of a few years ago. His top equity pick of the past year was Galaxy Entertainment Group, a Hong Kong–based gaming and resort operator whose stock closed at HK$36.55 ($4.70) on November 21, up 51 percent for 2016.
The No. 1 analyst covering the Consumer Discretionary sector, Chen Luo of BofA Merrill, says his best stock buy for 2016 was home appliance maker Midea Group Co., which rose to 27.58 yuan ($4.00) year-to-date through November 21, a 26 percent gain. The company enjoys leadership in a market that is once more on the verge of seeing rising demand for air conditioners, Chen says.
“We expect the China consumer discretionary sector to continue to see below-trend growth in the near term, due to headwinds such as China macro weakness, threats from e-commerce, and the commercial property glut,” he explains. “While we are generally cautious on the sector, we believe companies that benefit from structural changes — such as the shift to consumer services, pursuit of health, or quality service — or industry consolidation are likely to outperform.”
BofA Merrill’s Yuanyuan (Tina) Long takes top honors for the Consumer Nondiscretionary sector. Her No. 1 pick for the year was distiller Kweichow Moutai Co., whose share price climbed 42 percent as of November 21, to 309.5 yuan. Kweichow, which is famous for its mao-tai, a drink that is similar to vodka but sweeter, has benefited handsomely from the bottoming-out of hard liquor consumption in China over the past year. “Moutai, as the leader in the space, not only posted resilient earns during difficult times but also led its peers in its pace of recovery by posting sales growth at the teens level in the first three quarters,” Long says.
China’s rising middle class is also thirsty for power and energy. That development leaves Citi’s Pierre Lau, the winning analyst for Public Utilities, excited about the future of the sector, especially given growing appetite for clean energy. Lau’s No. 1 pick, China High Speed Transmission Equipment Group Co., has seen its share price jump 37 percent year to date, thanks to rising demand for its products at home and abroad. On November 21 the stock closed at HK$8.57.
“China’s slowdown has some but limited impact on the clean-energy sector, which is essential for emission reduction and environmental protection,” Lau says. Global investors should also consider buying shares of Chinese companies engaging in downstream gas distribution, wastewater treatment, and wind energy equipment manufacturing, he adds.
To view the All-China Research Team, click on the Leaders link in the navigation table on the right.
For details on how we compiled this ranking, click on Methodology.