Skip navigation
Newswire

Some investors cool to China, not only for SARS

By Tony Munroe

HONG KONG, May 16 (Reuters) - China still beguiles with its economic growth, but some investors and analysts are cooling their views on China stocks -- and not just because of SARS.

China sceptics cite excessive competition, fear of a hangover from the capital spending boom and expectations that export growth can only slow, plus the outbreak of Severe Acute Respiratory Syndrome (SARS) which is crimping domestic demand.

"What China is experiencing right now is a reality check and a revision of expectations," said Martin Lau, senior portfolio manager at First State Investments, which oversees US$1.2 billion in Asia. "We have trimmed back slightly on a technical basis."

To be sure, China, with its explosive productivity, growing consumer class and seven percent economic expansion, remains a favoured market for Asia-focused investors, SARS notwithstanding.

Despite the outbreak, forty percent of money managers polled recently by Reuters and funds magazine Benchmark named China as the top regional investment destination from June to August, with South Korea edging China on a 12-month horizon.

But some in the market see holes in the China story.

Merrill Lynch recently cut its regional model portfolio weighting for China from "overweight" to "market weight", warning that SARS could slow near-term economic growth.

A Merrill survey of fund managers highlighted the growing trepidation towards mainland stocks.

"The ongoing SARS epidemic has led managers to lower their Chinese equity weighting and for the first time in the history of the survey, (fund managers) are underweight," Merrill wrote.

Citigroup Smith Barney slashed its model portfolio weighting on China to "underweight" from "overweight" -- a position it had held for a year -- saying SARS was just one factor.

"We've changed our minds because we think the facts have changed," said Ajay Kapur, regional strategist at Citigroup Smith Barney, saying the cyclical bull market in overseas listed China shares has ended.

While heavyweight cellular stocks China Mobile (Hong Kong) and China Unicom Ltd have been a drag on the overall performance of China stocks in recent years, many counters have shined and the index of Hong Kong-listed China companies known as H-shares rallied to a February peak.

In reweighting its portfolio, Citigroup unloaded battery maker BYD Co , Huaneng Power International Inc , Tsingtao Brewery Co Ltd and Brilliance China Automotive . It held on to beaten-down China Mobile.

Merrill dropped Yanzhou Coal Mining Co Ltd and car maker Denway Motors and added China Oilfield Services Ltd to its model portfolio.

CHINA BULLS REMAIN

Longer-term China bulls say they are unconcerned by short-term hiccups. Many fund managers still like China for its low-cost manufacturing and increasingly affluent middle class.

"If everybody's bearish, it creates a greater buying opportunity for me," said Yang Liu, managing director at Atlantis Investment Management, which manages $700 million in Asia.

She said investors must be selective and time their plays among the 300 China stocks available to most foreign punters.

"You pick the best ones in the best sectors -- you don't worry about GDP growth," she said.

For many buy-and-hold investors China has been a losing bet. China Mobile, the biggest mainland stock by market cap, closed on Thursday at HK$16.65, compared with an early 2000 peak of HK$80.

Citigroup said 70 percent of China IPOs trade below their offer price.

"We are still bullish on China's long term outlook, although there are inevitably ups and downs," said Norman Ho, fund manager at Value Partners, which manages US$680 million and favours outsourcing and domestic consumption plays.

"China's low production cost advantage is here to stay for much longer," Ho said. "China's growing middle class of 200 million strong is wealthy enough to chase medium to big ticket items like housing, cars, mobile phones, PCs."