China’s stocks rose to the highest level in a week, led by consumer staples producers and banks, on speculation their earnings will be better sheltered from a slowdown in the world’s second-biggest economy.
Kweichow Moutai Co., the nation’s biggest producer of baijiu liquor by value, advanced to a five-month high after Huatai United Securities Co. recommended food and beverage companies. China Merchants Bank Co. rebounded after falling to a two-month low this week. China Shenhua Energy Co. led gains for coal producers after Citic Securities Co. said demand for the fuel may exceed estimates this year.
"Consumer stocks are the best bets now amid the economic slowdown and they will offer very stable earnings growth for a long period of time,” said Zhang Ling, general manager at Shanghai River Fund Management Co. “With tightening measures unlikely to be relaxed for now, the broader market is expected to trade in a range.”
The Shanghai Composite Index gained 20 points, or 0.7 percent, to 2,872.77 at the 3 p.m. close, the highest since May 11. Companies trade on the gauge at 13.2 times estimated profit, compared with a multiple of 19.9 over the past four years, according to weekly data compiled by Bloomberg. The CSI 300 Index (SHSZ300)rose 0.8 percent to 3,139.38.
The Shanghai Composite has slid 6 percent from a five-month high on April 18 amid concern government measures to cool inflation will slow corporate earnings growth. The central bank has raised the reserve-requirement ratio for banks 11 times since the start of 2010 and boosted interest rates four times. The decline has pared this year’s gain to 2.3 percent.
Inflation Outlook
Governor Zhou Xiaochuan said China’s central bank was focused on controlling prices, without mentioning threats to growth, an indication that he has been more concerned about inflation than any risk of a growth slowdown. The central bank will "control the monetary conditions behind excessively rapid gains in prices,” Zhou said in comments dated April 18 and released yesterday in the central bank’s annual report. The comments tally with a monetary policy report released May 3 and were before data showing industrial output growth weakened last month.
Home prices rose in China’s 67 of 70 cities monitored by the government in April from last year, led by smaller cities that are defying efforts to control property prices nationwide. Housing prices increased at a faster pace in smaller cities and slowed in major ones, data posted on the statistics bureau’s website today showed.
Consumer Stocks
A gauge of 19 consumer staples producers in the CSI 300 gained 1.6 percent, the most among 10 industry groups. Kweichow Moutai jumped 3.9 percent to 194.95 yuan, the highest close since Dec. 20. Wuliangye Yibin Co., China’s second-biggest maker of white liquor by market value, advanced 2.4 percent to 33.84 yuan.
Food and beverage companies will have “solid” earnings growth this year and are very good “defensive” stocks, analysts led by Hong Ting at Huatai United Securities wrote in a report dated yesterday.
Merchants Bank rose 1.7 percent to 14.30 yuan. Huaxia Bank Co., partly owned by Deutsche Bank AG, advanced 3 percent to 12.22 yuan. China Minsheng Banking Corp., the nation’s first privately owned bank, climbed 2.7 percent to 6.02 yuan.
Inflation and interest rates will be “peaking soon” in some emerging markets such as China and India which tightened monetary policy early, according to RBC Capital Markets.
"Inflation may be approaching a tentative peak in a number of emerging-market economies,” RBC said in a note to clients. This may allow central banks “room to pause, stop or scale down their rate-hike plans in the second half of the year,” the note said. RBC cited China, India and Brazil as nations that have been “at the front end of the growth/inflation cycle in emerging markets.”
Rising Coal Demand
Shenhua, the nation’s largest coal producer, rose 0.9 percent to 28.53 yuan. Yanzhou Coal Mining Co., the fourth biggest, advanced 0.9 percent to 32.99 yuan.
Demand for thermal and coking coal may increase between 8 percent and 10 percent this year as less rainfall curbs supplies of hydropower and boosts demand for coal-fired electricity, Luo Zeting, an analyst at Citic Securities, wrote in a report today.
Shanghai Zen Investment Management Co., a hedge fund that beat 99 percent of its rivals this year by betting on commodities, is cutting its allocation in raw materials by 30 percent and likely to buy China and U.S. stocks.
The Zen Macro Strategic Fund may purchase equities in Asia including Hong Kong and India because falling commodity prices will reduce inflationary pressure, Jacky Cheung, chairman of Zen Investment, said in an interview at its offices in Shanghai on May 16. China’s financial and power companies are attractive because of valuations, he said, without naming any.
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