Resilient Shanghai stocks: a safe haven?

Shanghai stocks, led by health care-related shares, have weathered the COVID-19 pandemic better than expected — a performance largely credited to the government’s rapid response to the outbreak.

To be sure, there have been hiccups. The benchmark Shanghai Composite Index, which covers both Class A and B shares, posted a 4.5 percent decline for March, though it gained almost 1 percent in the last five trading days of the month.

By comparison, New York’s Dow Jones Index tumbled 13.7 percent in March, the Nikkei in Japan fell 10.5 percent, and Hong Kong’s Hang Seng slid 9.7 percent.

Even in China, the Shanghai markets outperformed sister bourses. The Shenzhen Component Index lost 9.3 percent in March, and the Nasdaq-style ChiNext Composite Index retreated 9.6 percent.

Year to date, the Shanghai index has dropped only 9.1 percent, compared with declines of between 20 percent and 30 percent in US, Japanese, German and French stock markets.

So are Shanghai’s Class A shares the global “safe haven” that some have touted?

“Whether A-shares can continue to be relatively independent of overseas markets in the future and truly become a safe haven for foreign investors depends on the performance of China’s economic fundamentals,” said Zhu Qibing, chief macro-economist at BOC International China.

China has been lauded for its quick and effective anti-epidemic response. Economic measures have been implemented to provide ample wiggle room for policymaking, Zhu said, and the economy has greater scope to maneuver in dealing with external shocks.

“All these decisions highlight the resilience of the country’s economic growth and can help unleash the potential of A-shares,” he added.

It comes as no surprise that Chinese companies involved in health-care industries have fared the best during the coronavirus crisis. As a sector, they are up 18.1 percent this year. Zhejiang Orient Gene Biotech Co surged 212 percent on Shanghai’s STAR Market this year, while Shenzhen-listed Intco Medical Technology Co soared 170 percent.

Trailing not far behind are companies related to farming, forestry, animal husbandry and fishing — up by nearly 13 percent. Heilongjiang Agriculture Co jumped by 57.7 percent, and New Hope Liuhe Co, an animal feed company, advanced 56 percent.

Not all sectors have been so fortunate. With travel restricted, the sub-index for aviation stocks has plummeted 21.6 percent since the beginning of the year. Juneyao Airlines Co has fallen 34.4 percent, while Air China shares declined 30.8 percent. Insurers, including China Pacific Insurance Group Co and China Life Insurance Co, have slumped 20.5 percent as a group. The banking sector, including PingAn Bank and Bank of Ningbo, has lost about 16 percent.

On an individual company basis, the best two performing stocks this year are Starpower Semiconductor and Fuzhou Rockchip Electronics Co, up 903 percent and 493.8 percent, respectively. The worst performing duo are Jiangsu Boxin Investing & Holdings Co and Beijing Xinwei Technology Group, which was the subject of negative press stories last year.

Many individual investors, already stung by the lifestyle changes wrought by the virus, are wary about investing in stocks.

Zhu Yao, 47, said he sold half his stock portfolio and transferred his assets to more stable investments like gold and bonds.

Min Yazhou, a 29-year-old entrepreneur, isn’t quite so pessimistic. He said there are buying opportunities amid the crisis, particularly in undervalued stocks with development potential, such as companies related to new infrastructure.

Yang Liu, an analyst with Minsheng Securities, said the short-term effects of COVID- 19 have boosted demand for household necessities and home entertainment, while hitting offline retailers and manufacturing.

She predicted infrastructure development companies may benefit in coming months from government policy support, while industrial chain globalization and export-oriented industries are likely to suffer.

Yang cited the case of consumer electronics and semiconductors, sectors related to industrial chain globalization. Companies in that realm face risks of upstream supply chain shortages and weak global demand in the next two quarters, she said.

CITIC Securities is predicting that the A-share market will likely bottom out this month.

“China had led other countries in controlling the epidemic, and China’s economic activity is likely to take the lead in the recovery, with growth mainly driven by domestic demand,” said Qin Peijing, chief strategist of CITIC Securities.

“Chinese stocks and fixedincome assets,” he noted, “will become more attractive relative to assets of developed countries and will be the first choice in the process of global capital reallocation.”

Market rally?

Qin said A-shares could kick-start a market rally in the second quarter, with government fiscal stimulus as a catalyst. Technology leaders in realms such as 5G phones, cloud computing and Internet data will remain a major investment theme for the rest of the year, he added.

What stocks to buy? Qin said he particularly likes companies that benefit from domesticdriven demand and companies that don’t rely heavily on either overseas revenue or upstream material supply chains.

Even amid the coronavirus pandemic, the Shanghai stock markets have been welcoming new listings. Initial public offerings hit a new peak in the first quarter, when 34 companies raised an aggregate US$9.8 billion on Shanghai’s main board and new STAR Market, according to data from the Shanghai Stock Exchange. That surpassed new listings on New York’s Nasdaq, where 17 companies raised US$5.13 billion in first-quarter IPOs, according to Refinitiv, a global provider of financial markets data and infrastructure.

“I’m not surprised,” said Zhu Ning, associate dean of the Shanghai Advanced Institute of Finance. “There are a huge number of startups in China, and Chinese companies are increasingly inclined to list on domestic markets that have higher valuations.”

The strong performance of the IPO market this year is partly due to the 30.7-billionyuan (US$4.32 billion) January share sale by Beijing-Shanghai High Speed Railway, the biggest first-quarter deal globally.

Most of the 34 IPOs in the first quarter were related to technology companies and industrial firms, followed by the medical sector. All 34 are now trading above their initial offer prices.

EY, a multinational professional services firm, said it expects the IPO market in China to flourish, underpinned by the recent implementation of the new Securities Law and reforms to the ChiNext market. New listings can now proceed via a registration system without undue regulatory controls that formerly choked the process.

“COVID-19 has created business opportunities that are likely to continue once the outbreak is under control, particularly in the health-care sector,” said Ringo Choi, EY’s Asia-Pacific leader for IPOs.

Terence Ho, EY’s China IPO leader, said he is “cautiously optimistic” about the economy and IPO prospects for the rest of 2020.”

“The Chinese government has already rolled out timely policies to help companies, with more economic stimulus on the way,” he said. “These efforts should help once the outbreak is controlled.”