Copper has had a rough couple weeks. On Tuesday, the metal hit US$6,910 a ton, a three-month low. On Thursday, a lower-than-expected flash purchasing managers index (PMI) reading that showed China’s recovery was slowing, coupled with signs that the Fed in the US would taper its monetary stimulus, hurt prices as well. Adding insult to injury, data on copper production in China may have been inflated by up to 15% for much of the year. Fake invoices and arbitraging on exchange rates have exaggerated demand. Even still, it’s clear that copper prices, which tend to rally on bold pledges to build infrastructure in countries such as China, will remain low for a while. Analysts are generally bearish on the metal and UOB Kay Hian, an investment bank, expects the price to drop by 6% year-on-year. That’s bad for investors who have shares in Jiangxi Copper (0358.HKG, 600362.HKG), the world’s biggest copper smelter. The company is highly sensitive to the price of copper as 75% of its earnings are based on the metal. UOB says sell. CER thinks that, given the major pledge China made last week for rebalancing, the government is finally committing to healthy growth – or in other words, no major stimulus. Don’t expect the world’s second-biggest economy to re-build the value of the metal.
Baby boom boost
The world’s largest population is about to get that little bit larger. China is easing its one-child policy, bringing a potential wealth of consumer stocks into play. Or does it? While the population will certainly see some kind of boost, it’s hard to quantify. Some estimates by leading demographers say 6 million over the next three years; economists at Bank of America Merrill Lynch forecast up to 9.5 million more babies could enter the population. However, the high cost of raising a child means not everyone who is able to will have a second baby. Plays on this development should probably look shorter term for more certain opportunities. Infant food and product makers are on the radar. With child formula, the sector favors foreign over local brands. Abbot (ABT.NYSE), Danone (BN.EPA) and Nestle (NES.VTX) lead the pack. In infant products such as diapers and wipes, local and global firms can be accommodated. Hengan (1044.HKG) and Kimberly Clark (KMB.NYSE) are big names with solid growth outlook. More broadly, China’s economic reforms should unlock huge consumption at all levels – eventually. “Over the long term, there is little question that investors should look for meaningful exposure to the Chinese domestic-consumption story. But now may not be the time,” Dean Cook, investment analyst with Duncan Lawrie Private Bank in London, wrote in a note.
Stand by your bank
Chinese banks. These huge, hulking institutions are an investment headache these days. Their government patronage and massive assets allow them to dominate a powerful economy, and their dividend payments are generous for Chinese companies loath to sharing the wealth. But they are also prone to swings in the economy, political tinkering and some poor decision making. Crucially, they make much of their money from interest rate controls that favor lenders over savers. So when senior leaders confirmed at the recently concluded Third Plenum policy meet long-expected plans to liberalize interest rates and accelerate financial reform, observers got jittery. The “Big Four” of Bank of China (3988.HKG, 601988.SHA), Industrial and Commercial Bank of China (1398.HKG, 601398.SHA), China Construction Bank (0939.HKG, 601939.SHA) and Agricultural Bank of China (1288.HKG, 601288.SHA) are the ones to watch. But for now, according to Barclays analysts, there is minimal near-term impact on the banking sector from the reforms. There were no unexpected announcements at the plenum and the rollout of changes will be gradual. Looking ahead, they see lower government GDP growth targets, more normal total social financing levels and a tighter squeeze on interbank businesses as reasons to maintain a defensive view of banks.
Busy week ahead for Chinese firms in Hong Kong. YST Dairy Farm, China’s fourth-largest producer of raw milk, will list in Hong Kong on Tuesday. The company will look to raise US$424 million, which puts it at the low end of its pricing range. China’s embattled milk industry might look like a tough sell these days but government support for consolidation in the dairy industry may help firms such as YST swallow up more of the market in the not-so-distant future. Hengshi Mining Investment, an iron ore mining and processing company based in Hebei province, will issue shares in Hong Kong on Thursday, along with Dong Peng, a ceramics company. Phoenix Healthcare Group, a Beijing based firm, will list on Friday. The bad news for Chinese firms in Hong Kong this week is that JP Morgan pulled out from underwriting China Everbright Bank, which has yet to announce a listing date for its H-Shares. The move may shed some light on the US Department of Justice investigation into how investment banks hire the children of high-ranking Chinese officials. But it doesn’t say much on the prospects for Everbright.