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Dr Chan: 13.5 & End of One-Child Policy; Buy Policy-Driven Stocks & Healthcare
By: Dr Chan Yan Chong
Articles (200) Profile

Wall Street rallied on the first trading day of November, with the Dow Jones Industrial Average rising to 17,828 points, just 2.8 percent shy of its all-time high of 18,351 points. Between the beginning of this year and August, the Dow has been moving within a narrow band, trading within 1,000 points. It went into a nosedive in August on fears of the Federal Reserve raising interest rates in September. By end September, the Dow finally bottomed out and began to begin its assault on the historical high as the shadow of the rate hike dispelled.

Slim Chance of Rate Hike

Signs of further monetary easing by the European Central Bank is one of the reasons the US stock market is ploughing ahead. The purpose of the US raising interest rates is to maintain a strong dollar. Now that the greenback is already so strong without raising interest rates, there is no reason for a rate hike. The fact that the Fed is still talking about it suggests that the Fed may be trying to drum up the dollar with its words alone. Thus, it seems that the chance of a hike this year is indeed very slim.

The stock markets in Singapore and Hong Kong are still not performing as hoped for, mainly because of the volatility of China’s stock market. The fifth plenary session of the 18th Communist Party Central Committee has come and gone without inciting any speculative trading in Chinese A-shares and Hong Kong stocks. The main thrust of the fifth plenum is to lay the groundwork for China’s 13th five-year plan. However, stocks related to this policy have already gone through several rounds of speculations; outdated good news that everyone already knows is not good news anymore. Many people would likely take this opportunity to liquidate instead.

Policy-related Stocks Did Not See Immediate Benefits

On 2 November, two Hong Kong-listed stocks linked to the 13th five-year plan – Xinjiang Goldwind Science & Tech Co (2208) and China Mengniu Dairy Co (2319) – saw a huge single-day drop. Goldwind fell by 10 percent, while Mengniu fell 8.5 percent. Goldwind is an environmental stock that has been popular in recent days, while Mengniu stands to benefit from the new two-child policy. Falls in these concept stocks would deal a serious blow to shareholder confidence.

While policy-related stocks are underperforming, that does not mean they are no good; it is just that shareholders need to be more patient in waiting for the market to digest the stocks thrown up by hit-and-run speculators, before the stocks could possibly start its ascent again.

Another reason the stock market did not rally is the lack of a target. The media has identified a large number of policy stocks linked to the 13th five-year plan, all of which are familiar names from the infrastructure, internet, health care and green industries. However, these companies that thrive on national policies have already gone through several rounds of speculative trading and the profit-taking during each round of speculation would actually scare off new funds.

Insider Trading and Corruption

Recently, many senior executives of financial institutions were taken into custody on charges of insider trading. According to the news, one of China’s most prominent private equity investor, Xu Xiang, was arrested on the similar charge of insider trading. On the day news of Xu’s arrest surfaced, China A-shares opened sharply lower, which is most likely a knee-jerk reaction to the news. Later in the day, another news of the government’s anti-corruption effort – the arrest of Zhang Yun, President of the Agricultural Bank Of China (1288) – weighed further on the Chinese market. These are all signs that anti-corruption investigators are conducting in-depth probe into corruption within China’s financial circles.

Theoretically, when a senior executive of a state-owned enterprise is arrested, someone will be picked to replace him. Therefore, in the long run, the arrest will not impact the state-owned enterprise too much, although knee-jerk reactions are inevitable. Thus, in the short run, state-owned financial stocks may face significant pressure. Since the financial industry is linked to all industries, the whole stock market will be clouded over, so investors should be wary.

Investors’ Logic

The current mood of the stock market is fairly optimistic. The lack of excitement is the aftereffect of the breathtaking rebound in early October, when a lot of investors took profit. More investors believed that was the best time to ride on the rebound to escape from the locked-in positions they were forced to take during the market crash in August and September.

The recent fifth plenary session has set the tone for the 13th five-year plan, and the market will naturally be swarmed with a lot of policy-related stocks. Most retail investors may not have enough money to buy all these concept stocks, so they will only buy into one or two counters from each sector. For such concept stocks, investors should note the following: 1) Have speculations started? 2) For how long have the speculations been going on? 3) How much have the stocks risen? Investors should stick to the overarching principle of not going after stocks that are already at high price points. Nor should they pick shares that have depreciated by more than 60 percent, as such a drastic plunge usually suggests that those stocks were heavily overvalued previously.

More Easing Measures May Come

It is a good thing that China’s gross domestic product (GDP) only grew by 6.9 percent over the third quarter, for it gave Chinese leaders more reasons to relax monetary policies. As long as the central government is willing to ease policies further, sustaining a 7 percent growth is not a problem. I believe the central government will accelerate the pace of monetary easing and expand its scope of infrastructure investments, as well as roll out more measures to sustain the growth of the real economy.

It has been more than three decades since China embarked on its open door policy and economic reformations. As a result, the scale of mainland China’s economy grew exponentially. In the past, Hong Kong’s GDP accounted for 30 percent of the GDP of the whole of China; today it is only three percent. One contributor to China’s GDP expansion is the sharp rise in wages. After 30 years of reformation, wages have gone up by 100 times. Such a large increase naturally leads to a significant rise in the cost of production, which effectively reduces the so-called demographic dividends to zero. Today, Hong Kong and overseas funds are leaving China in droves as they look for newly industrialised countries where they can still reap some demographic dividends.

When factories close, what will happen to all the retrenched workers? This is the biggest challenge facing Xi Jinping that his 13th five-year plan needs to address. For this reason, the plan encourages creativity and entrepreneurship, hoping that the unfortunate workers who are retrenched today will become the bosses of tomorrow. For that, China can draw on its population of 1.3 billion and its 109 million-strong middle-class population to encourage creativity and entrepreneurship – there are bound to be ways to earn money from this huge population.

Direct Beneficiaries: Maternal/Baby Care, Healthcare 

The decision to abolish the one-child policy has two outcomes. One is to retard the ageing of China’s population, and the second is to stimulate consumption. When families start having one more child, they will naturally spend more money. However, we should bear in mind that the fruits of this change will only come about at least ten months later – the time it takes to give birth to a baby. For this reason, we are looking at next year for shares of children products companies to show any improvement in their performances. Companies that stand to benefit immediately from the two-child policy are those that cater to pregnant mothers, foremost of which is the healthcare sector. Apart from those listed in Hong Kong, there are many Chinese hospitals listed on the mainland bourses.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.

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