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‘Year of horse’ gallops into uncertainty

Shanghai: Chinese investors have been ushering in the ‘Year of the Horse’ with intense speculation as to what kind of stocks are likely to perform well in this ‘year of reform.’

The performance of the Shanghai Composite has been erratic in January. While it may be too early to herald a systematic rally, some predictions can be made from the direction of government policy and performance of the real economy.

The traditional banking sector will be dealing with new challenges even as it continues to lead the market. Cyclical segments, including the notorious heavy mining industries may prove to be surprisingly good bets, while the booming consumer goods stocks will remain popular, but may not necessarily yield great returns for investors.

Although China’s banks are the market heavyweights, they will face a series of challenges throughout the year — be it from internet banking, micro-credit institutions or a more liberalised interest rate regime.

In the week between 20 and 24 January, the Shanghai Composite surged a significant 2.16 per cent to 2,051 points, after the People’s Bank of China injected 255 billion yuan (Dh153.2 billion) liquidity into the interbank market, the largest one-day amount in 11 months.

Market participants, used to being bailed out, breathed easier after this infusion. Last week too, bank shares led incremental gains on the Shanghai Index. China Minsheng Bank edged up 2.64 per cent, Bank of China rose 1.61 per cent while ICBC gained a little more.

In recent times, banks have been under a new kind of threat from internet finance. Substantial deposits have been diverted into internet products such as Yu’E Bao, a personal online finance product by internet giant Alibaba, which allows users to place any amount of savings into a money market fund. At the end of 2013, Yu’E Bao had 43 million users with aggregate deposits of 185 billion yuan, the single biggest public fund in China.

In order to claw back deposits they lost to internet finance, big lenders recently raised interest rates. In June 2012, the Chinese central bank made a radical decision to allow lenders to adjust up to 10 per cent, the upper limit of the floating band of deposit rates. Not surprisingly, the conservative banks have not been too enterprising with their new found freedom. However, earlier last week, the China Construction Bank, the Agricultural Bank of China and the Bank of Communications raised the deposit rate by 10 per cent to the upper limit for various products.

In the short term, this competition from internet finance may result in some liquidity problems. The good thing is, it is serving as a wake-up call to banks that there are no more easy profits built solely on deposits, loans and remittances. They must also promote intermediary business and wealth management products.

In previous years, banks often saw their profits grow 30 to 40 per cent annually, making them blue-chip stocks. However, as liberalisation hits the once-mighty banks, investors are at a loss to figure out how efficiently, these lenders will deal with the situation.

With rise in disposable income, domestic consumption-focused companies will remain the centre of attraction this year. Indeed according to the World Bank, China is set to enter the ‘upper-middle-income’ bracket, meaning there is a long term positive fundamentals for Chinese consumption sector.

Whether it’s the gaming industry or the growing online business, many sectors seem well-positioned to take advantage of rising incomes. Health care is a long term viable sector especially with the government allowing greater role for private investors, including foreign companies.

From the stock market performance perspective, the technology industry — be it phones of TVs, was clearly one of the best last year. However, given their popularity and boom, these stocks are likely to get more expensive, yielding lower returns.

Cyclical industries, which see long periods of downs, are being touted as good stocks to pick up this year. For example, the metals and mining business, which has been in the shadow following environmental concerns, may actually see good prospects. The airlines industry, too, with its high capital investment threshold, can come up with huge gains. Companies with low valuation may experience renewed interest.

Analysts are certain that cyclical industries, which were hit most severely by slumps last year, will see a chance for big rebound when the market recovers. Share prices of many blue chips had dropped below book value as the stock market retreated in the beginning of 2014. These shares may now ride a crest in the ‘year of the horse.’