First things first: we down at the Red Dragon Fund wish you all the best for the year of the golden pig. And what a year it might be.
There is already talk about what increased under-the-duvet activity from Chinese couples – keen to conceive during a propitious period that comes along only once every 600 years – might do for consumption stocks.
"The Year of the Golden Piggy Bank", we might call it. In fact, it’s a pretty safe bet that someone else already has.
The past month, though, has not generated the abundance of riches expected from the next 12. Last time we discussed the "correction to come" in the A-share market and, well, it came – and largely thanks to the government’s concerned statements and cooling measures.
It’s unclear whether Beijing actually has a designated hatchet man for this kind of job. If it is looking for one, National People’s Congress vice-chairman Cheng Siwei might be happy to oblige.
Cheng mentioned stock market bubbles to the Financial Times on January 30, which – after various other measures including a clampdown on bank loans for stock-purchasing purposes – was enough to send the Shanghai Composite Index (SCI) tumbling 5% the following day.
He was at it again on February 6, saying that 70% of Chinese listed companies are not worth investing in and the weakest ones should be forced out.
By this point the SCI had already dipped below 2,700 and that was enough for investors. Come the end of the week, it was sitting at 2,730 and looking reasonably comfortable.
As a result of the January-February slide, it appears that our move to jettison Baosteel 600019 and Yili 600887 was justified as both stocks suffered.
Lucky we held on to Daqin Railway 601006, though. When the books were totted up on February 9, the stock was up by about 30%. One worth hanging on to for a bit longer, perhaps.
The SCI is expected to hover around its current level in the run up to the National People’s Congress in March and so the Red Dragon Fund will sit tight for now and see how things develop.
But the long-term outlook is bullish. JP Morgan expects the RMB to appreciate to 7.0 to the US dollar by the end of 2007, which means the liquidity overflow will continue for quite some time.
Then there is strong domestic consumption, with annualized retail sales growth still comfortably in double-digit territory. Government efforts to support rural development over the coming year are expected to see a consumption renaissance in some China’s poorest parts, but this is working from a pretty low base.
Make no mistake that, in the short term at least, the continuing rise of the urban middle class – and increased discretionary spending – is the one to watch.
To a certain extent, the stocks on our watch list reflect this. Looking for growth in a consolidating market, mid-cap blue chips are a favorable target.
Tsingtao Brewery 600600, equipped with aggressive expansion plans, is a possibility, as is JX Copper 600362, a materials sector leader with a price-to-earnings ratio of just 8.0. Shanghai Zhenhua Port Machinery(600320), a port equipments supplier with global exposure, may also be worth a punt. Like Daqin Railway, we’d be looking for Shanghai Zhenhua to benefit from development in China’s logistics and infrastructure.
Finally, there is our old friend Baosteel. Okay, so we only dropped it a few weeks ago but the stock has been under heavy selling pressure so we’re looking for the best moment to pick it back up.