I outlined eight Chinese stocks yesterday that could have strong bull runs in 2017. Today I want to take a look at a few Hong Kong and China stocks to avoid next year -- or, if you happen to be a short seller, to target.
Given the likely travails over trade under the Trump administration, it's a good idea to focus on companies that get much of their business domestically, within China's borders. While the new president will struggle to push through wild ideas, like his proposed 45% tariff on all Chinese goods, he's sure to win a few battles here and there on individual industries.
First off, I want to outline three stock that the brokerage CLSA currently has "sell" ratings on -- but that it says could be worth a punt next year as dark horses. Each comes from a troubled industry under current conditions. The idea is to watch for any turnaround.
Speaking of watches, one of those three is Chow Tai Fook (CJEWY) , a jewelry company that has its name plastered all over half the buses in Hong Kong. Luxury spending has taken an absolute hammering in Hong Kong due to China's crack-down on corruption. Gone are the days when middling officials would cross the border with a suitcase full of Breitlings and Audemars Piguets to use as bribes back home.
But Chow Tai Fook reports that same-store sales rose in October and November, over a very low base from last year. If you take the company at face value, it says the worst is "almost over." Set-gem sales have turned positive, and the decline in gold sales has narrowed. There's a macro play here, too. Gold and jewelry are a great hedge against the weakening yuan for those Chinese people who can't get their wealth out of the country.
The Aluminum Corporation of China (ACH) , better known as Chalco, and China's largest producer of raw aluminum, is another counter-consensus call. Trump is sure to bash China on its aluminum production. But that industry could be China's next focus to tackle in terms of reducing overcapacity, in a bid to appease those tensions and also reform its overproducing, underperforming state-owned enterprises.
The third contrarian play at CLSA, which gave its 2017 "lookahead" on Thursday, is China Life Insurance (LFC) . It will be under pressure from higher interest rates. But it will also benefit from higher bond yields. To CLSA, it's the best of a bad bunch -- the brokerage still has a "sell" on it, but cites it as possibly the first to turn around.
In fact, CLSA has a sell on the entire life-insurance sector. Listed companies are under massive pressure from private companies that offer high payouts for frankly dodgy quasi-trust products. This is causing the listed players to hire rank after rank of new agents. China Pacific Insurance (CHPXY) , New China Life Insurance HK:1336 and China Taiping Holdings (CTIHY) are stocks to avoid in the sector.
Buyer beware. All three of the above contrarian plays could go either way in 2017, based not on corporate performance, but rather on industry conditions.
Casinos are on their way to Japan, it's now confirmed, and so too is many a Chinese tourist, as I outlined earlier this week. However, airline growth in China may slow after two very strong years. Cathay Pacific (CPCAY) , Hong Kong's flagship carrier, is at particular risk from the strong U.S. dollar because it gets 50% of its business in other currencies. It's also likely to be hit by rising oil prices.
The main sector to avoid next year is property in Hong Kong. The government recently brought in an added 15% stamp duty on all home purchases, bar first homes. Coupled with the pre-existing 15% stamp duty on buyers who are not permanent residents, and foreigners are now looking at a 30% markup on residential real estate.
That will deter mainland buyers. Previous attempts to curb the market have had little effect. But 30% is hefty freight, and Hong Kong, with its currency linked to the U.S. dollar, will also import interest-rate hikes by the U.S. Federal Reserve. After December's hike, the Fed has telegraphed three more increases next year.
CLSA anticipates a 7% correction in Hong Kong property prices next year. Though the numbers aren't directly comparable, that comes on top of a 5.5% drop in prices in the 12 months through the third quarter of this year, according to Knight Frank, which ranks Hong Kong third from bottom among 55 nations that the property brokerage tracks. Only Taiwan and Ukraine fared worse.
Watch out for the Link REIT HK:0823, Asia's largest real-estate investment trust, which manages car parks and shopping malls mainly at public housing estates. Also beware Henderson Land (HLDCY) , CLSA advises. In its eyes, the worst performer will be Kerry Properties (KRYPY) .
Still, holding power is very strong in Hong Kong, where the central Monetary Authority has been tightening home-lending rules since 2010. That should prevent any dramatic downward movement or crash in prices. Supply is still tight -- there literally aren't enough apartments to house the existing population, leading to many college graduates continuing to live at home.
Another reason to expect a minor slide rather than crash in home prices is that the banks learned their lesson from the Asian financial crisis. Brokers now joke that back in 1997 you only needed to show up with a Hong Kong identification card to get a mortgage. The average mortgage repayment did surpass 100% of income -- yes, people were spending more on their home loan than they earned. That's far from the case this time around.