SHANGHAI (Reuters) – Concerns over the scum in the Chinese stock market and measures authorities could take to curb it are forcing investors to leave popular tech and consumer sectors to turn to small-cap stocks and other sequestered actions in sectors such as banking.

FILE PHOTO: A man wearing a protective mask is seen inside the Shanghai Stock Exchange building, as the country is hit by a new coronavirus outbreak, in the Pudong financial district of Shanghai, China, February 28, 2020. REUTERS / Aly Song

This churn saw investors rushing out of popular market darlings such as Tencent Holdings Ltd and Meituan. Shanghai-listed spirits maker Kweichou Moutai Co Ltd, a popular bet on rising consumerism in China, plunged 25% from its Feb.18 high.

The Hang Seng TECH Index, which tracks Hong Kong-listed tech giants including Tencent and Alibaba Group Holding Ltd, plunged more than 6% on Monday, extending a decline that took the benchmark down 27% from its peak just two weeks ago.

“The bubble is bursting,” said Dong Baozhen, a Beijing-based hedge fund manager, referring to the sharp drop in tech and consumer stocks. The specter of inflation and the credit crunch is a high-profile equity “killer”, he said.

Instead, there are signs of money seeking refuge in the banking sector – once shunned for fear of exposure to bad loans linked to the virus – and old-fashioned small-cap stocks, as well as sectors ready to profit. most of the economic recovery, such as energy. Amid the bloodshed in tech, financial stocks have been relatively firm while a small business tracking index barely budged.

Growth-oriented stocks have suffered globally in recent weeks from growing concerns about inflation. In China, moreover, fears that authorities may be eager to scale back generous pandemic-era stimulus packages have led to a near-panic sell-off of such shares.

At the annual meeting of the National People’s Congress of China this month, authorities set an economic growth target of over 6% for the year, disappointing market expectations.

The target is conservative, as if it “creates leeway for policymakers to take action to contain asset bubble risks in both stocks and real estate,” analysts said Monday. from Citi Private Bank in a client note.

In addition, comments by senior banking regulator Guo Shuqing against asset bubbles last week also sent a hawkish message reminding markets that China is the world’s most expensive market for non-financial stocks.

Even after the recent massive sell-off, Moutai’s price is 55 times higher than earnings, while Tencent is trading at 45 times.

The combination of high valuation and the government’s political leaning “could be very significant for Chinese stocks as policies still strongly influence the market,” Citi said, forecasting another 10% drop in the benchmark. Chinese CSI300. The index hit a record high on February 18 and has lost 14% since.

HIDDEN GEMS

Michelle Leung, chief executive of China-focused asset manager Xingtai Capital, said the bubble in China’s large-cap tech and consumer staples was in part fueled by the rush of global investors to increase their exposure. to China as it recovers from the COVID-19 pandemic.

“If you’re trying to buy China fast, the easiest thing to do is buy an exchange-traded fund, index fund, or large-cap consensus name,” and this caused a bottleneck at Moutai, Alibaba , Tencent and the like, she said.

Many consensus names are still valued at 60 times their earnings or more, which “doesn’t quite make sense at this point,” said Leung, a bottom-up value investor.

Leung’s half-billion-dollar long-only fund has outperformed the MSCI China Index by around 20% per annum over the past three years, justifying a ‘buy hidden gems’ strategy then. that most investors are looking for momentum.

Its portfolios include electric scooter producer Yadea Group Holdings Ltd and property management company A Living Smart City Services Co Ltd, bought at 8 and 11 times price-earnings ratios respectively.

Brian Bandsma, New York-based portfolio manager for Vontobel’s Quality Growth Boutique, said he was heading into defensive stocks because companies like Meituan and Nio Inc clearly overvalued, even putting them in bubble territory. .

Liam Zhou, founder of Shanghai-based Minority Asset Management, recommended buying Chinese bank stocks, citing the sector’s low valuation and reduced risk from the government’s deleveraging campaign.

Chinese banks are lagging behind, but have rebounded to a three-year high in recent weeks, and the sector is still trading at a 30% haircut on average on their net assets.

Reporting by Samuel Shen and Andrew Galbraith; Editing by Vidya Ranganathan and Christopher Cushing

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