I attended the 2017 "lookahead" briefing by the brokerage CLSA on Thursday, led by the brokerage's head of China and Hong Kong strategy, Francis Cheung. While CLSA has expanded its coverage to U.S. stocks, typically seen through an Asian prism, its focus has always been on Asia. And it puts out pretty sensible research, as well as in-depth stock analysis on little-covered Asian companies.
So I paid attention when the company made some calls on stocks and currency. CLSA identified eight stocks likely to enjoy bull runs next year. They also identified some stocks to avoid -- I'll address those tomorrow.
Just as 2016 was a volatile year, with the Brexit decision and a Trump victory, 2017 will also be bumpy as the new president puts his policies into effect, CLSA anticipates. China is at risk of a rising tide of protectionism, although this may have the inadvertent and positive effect of forcing the country to clean up the overcapacity produced by its bloated state-owned enterprises, as well as to reform its banking system.
The MSCI China index should post a gain of 8% next year, CLSA predicts, while the Hang Seng in Hong Kong should rise 6%. That's based on an estimate of China's gross domestic product hitting 6.5% -- smack in the middle of its existing forecast range for 2016.
That's a notch down from the 6.5% to 7% range that Beijing essentially insisted on at its agenda-setting meeting for the year in March -- a range it's sure to hit, as I explained as China prepared to release its "massaged" first-quarter figures.
Trade is the main challenge. The United States already has the most trade disputes with China at the World Trade Organisation, with 19 in the works. A hawkish Trump won't likely be able to push through all the curbs he would like to see on Chinse goods -- particularly not the 45% tariff on Chinese imports he has proposed. That would require approval from Congress, something Trump is highly unlikely to get.
But he is likely to secure victories on specific goods. The industries that are most at risk are steel, aluminium, automobile and solar glass, wind-power equipment and car parts.
Trump has also bashed China as a currency manipulator. True, the yuan has fallen 3.5% against the U.S. dollar since September. But it has gained a similar amount against the weakening euro and yen. Since Beijing manages its currency against a basket of currencies, there's little merit in Trump's argument, according to CLSA's Cheung.
Cheung anticipates the Chinese currency falling to 7.3 yuan to the U.S. dollar. That's a weaker performance than current consensus, which anticipates a cross rate of 7.1 yuan to the greenback by the end of 2017.
When it comes to China, the sectors that are likely to benefit the most next year are those that capture domestic demand -- and that is where the brokerage is devoting its attention. That means internet stocks, technology and health-care companies.
In terms of consumer goods, CLSA's top pick is Anta Sports Products (ANPDY) , which has its own strong brand but also now owns Fila. It has a market-leading position and is also showing strong revenue growth. TAL Education (TAL) is a somewhat offbeat play for those outside China perhaps, but the company delivers after-school tutoring and English classes -- massively in demand in the mainland.
Tech favorites Alibaba (BABA) and Tencent (TCEHY) are also on the brokerage's shortlist. E-commerce continues to boom across China. This year was a dull one for Alibaba, in which growth decelerated from its heady pace, and due to the company's campaign to stamp out fakes being sold on its system. But it could post a 20% increase in sales volume in 2017 after the cleanup.
Tencent, meanwhile, is a leader in mobile games, with CLSA predicting a pop of as much as 44% in that area. Although virtual-reality games aren't ready to go live in China yet, they could be ready by the end of next year.
China's property stocks have been the second-worst sector so far this year. But it seems that local restrictions on property purchases and the People's Bank of China's bid to curb excess liquidity have likely averted a bubble. With the shares beaten down, this could be a good entry point, CLSA says. Longfor Properties (LGFRY) is its top pick in the sector.
With China embarking on its ambitious One Belt, One Road initiative, construction companies stand to benefit. China is also desperately in need of domestic infrastructure, despite its binge on east-coast fast rail. China Communications Construction Co. (CCCGY) , better-known simply as CCCC, is the best-positioned company to benefit from "OBOR," CLSA believes. The brokerage is overweight the sector in general, anticipating an increase of around 20% in fixed-asset infrastructure investment.
China's aging and wealthier population is increasingly demanding improved health care, beyond the frankly woeful state system. The sector in general has performed well so far in 2016, with 10% growth in revenue through the first nine months of the year, and a 14% increase in profits.
Sinopharm (SHTDY) is CLSA's top pick, which it thinks could outperform the sector. There has been a tendering process under way in five provinces that is designed to lower the cost of drugs. But the price cuts have come in at 7%, less than the market anticipated. With U.S.-listed Chinese health-care stocks trading at 17x earnings, down from a three-year high of 21x, CLSA thinks the sector is a long-term buy due to the aging demographics, once the tendering uncertainty is out of the way.
Technology is a bit of a minefield in China at the moment. Mobile phone, computer and television penetration are reaching saturation point, meaning investors must be very choosy in the sector. CLSA identifies Semiconductor Manufacturing International Corp. (SMI) , better known as SMIC, as a potential play. It continues to gain market share in the foundry space, and its business is being driven by China's strong growth in integrated-circuit design.