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Sectors To Look Out For After China’s Rate Cut – Kevin Gin
Aspire, Thought Leaders | 04 March 2015
By: Kevin Gin, CFA
Articles (5) Profile

What an exciting week it was! There was a close impasse between the Greeks and Germans, and investors debating of whether Greexit will take place. Perhaps the question we should be asking is not when Greece will exit the EU, but rather when will Germany leave it.

Closer to home (ie. Asia), there was the Singapore budget, followed by the Indian budget, and then this week we will have the Chinese budget. Singapore’s budget was very social and is expected to yield a budget deficit of S$6.7 billion. The Indian budget was pro-business, going beyond the “Made in India” campaign, but with no surprises will yield a deficit of 3.9 percent of GDP.

However, China is interesting as it cuts it’s key benchmark interest yet again but by 25 basis points (0.25 percentage points). This is the second time China has cut its key interest rates within the last four months. Coupled with the lowering of the Reserve Requirement Ratio (RRR), it is only a matter of time before the effects will be felt in the economy, companies and market place. We strongly favor the financials!

Singapore’s long-term social budget 2015
Being an Asian centric investor and keeping our reports succinct, we will focus on the happenings in Asia. Singapore announced its budget on 23rd February, and as expected it was a budget to bridge the gap between the people and the state, rightfully or wrongfully.

The title of Budget 2015, “Building Our Future, Strengthening Social Security” sums up the underlying tone of Budget 2015. The budget is a more inclusive budget with the two largest increases in expenditure on economic development (S$10.1 billion, +49.9%) and social development (S$32.1 billion, +16.3%).

While there is no free hand out, we note that there is a projected budget deficit of S$6.7 billion vs last years budget deficit of S$0.1 billion (0.05 percent of GDP). One clear beneficiary of the budget are service providers such as education, healthcare and KPO.

Indian budget 2015: tax regime changes
Meanwhile, India’s budget was announced over the weekend and needless to say was no surprise that it was a pro business budget. The key was a greater pledge to upgrade infrastructure and improvement in the efficiency of social welfare programs. Surprisingly, there was a 11 percent increase in military spending, cut in corporate tax rates and tighter rules to curb tax avoidance.

The main beneficiaries is again the infrastructural, banks and real estate industry.

But much of the good news is priced in the market and its stocks. The risk reward ratio is not attractive at this stage in our opinion. Reference should be made to our earlier note dated 6th Feb. 2015. However, India and its companies are on my watch list.

China to further cut interest rates in 2015 budget
China, Asia’s largest economy and second largest economy in the world is very interesting. Amidst fears of slower economic growth China’s central bank has cut interest rates for the second time in the last four months.

PBOC cut its benchmark interest rates by 25bp, with one year lending and deposit rates at 5.35 and 2.50 percent respectively. This was ahead of February’s PMI Index survey which came in at 49.9, the second straight month of contraction. In its previous surprise interest rate cut in November, PBOC cut its one year lending and deposit rates to 5.60 (-40bp) and 2.75 percent (-25bp) respectively.

This was then followed by a RRR cut of 50bp to 19.5 percent on 5th February 2015, the first cut since May 2012 which economists estimate will loosen up between Rmb600-900 billion for the Chinese economy. This will flow through into the economy and companies, especially those that are aligned with Government’s policies.

We favour infrastructural plays, energy saving and environmental protection, next generation information technology, biotechnology, high end equipment manufacturing, renewable energy, new materials and alternative energy vehicles as investment flows will benefit these sectors.

Other beneficiaries would be interest rate sensitive stocks, in particular those in the banking and real estate sectors. Value emerges in property stocks with steep discounts to book values and undemanding price earnings ratios.

Whilst there are concerns of a slowdown in the Chinese economy and whether growth is sustainable, we believe the bears are excessively negative and have lost the plot. The Chinese economy is still growing in excess of 7 percent, and with increasing liquidity and a lower interest rate environment, we feel that it is far too early to write off China.

China’s equity markets as represented by the SHComp Index (3,32.72) or SHSZ300 Index (3,603.45) is relatively cheap at 15.95 and 15.73x earnings respectively, especially in light of recent changes in the macro environment. Furthermore earnings surprises on the upside is more likely to occur in the next 12 to 18 months as the monetary benefits come to effect.

Specifically, we like the financial sector, and favour more the real estate and banking sector. Between these two sectors, we will tend towards real estate companies given visibility in its balance sheet, and their relative valuation. The table on the next page offers a summary of what’s available to investors.

Kevin Gin, CFA focuses on valuation anomalies across certain industries and geographies. Kevin brings with him more than 25 years of investment experience.

Please click here for more information about this author.


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