At the dawn of the new millennium, there were few if any billboards in China promoting domestically produced vehicles. But times have changed.
“These days, if you come to Shanghai, on your way from the airport to the city, you will see a lot of advertisements offering interest-rate-free loans to buy cars,” notes David Cui, head of China strategy at Bank of America Securities–Merrill Lynch.
Consumer spending has been the biggest driver of China’s real gross domestic product growth since 2007, according to the National Bureau of Statistics, and the government believes that increasing domestic consumption will get the economy back on track after a year of slowing growth, devastating stock market losses — the benchmark Shanghai composite index plunged 65.4 percent in 2008 — and eye-popping market volatility (see “Year of the U-Turn”).
“There are 700 million to 800 million rural people in China who are underconsuming, and that has been one of the key areas the Chinese government has been targeting,” Cui explains, referring to Beijing’s 4 trillion yuan ($584 billion) stimulus package. Much of that money has been pumped directly into the economy, rather than being used to underpin shaky financial institutions. “Chinese commercial banks issued almost as many loans in the first quarter of 2009 as in the whole of last year,” he adds. “This use of monetary policy took my breath away.”
[To view the complete rankings of the Asia’s top analysts chosen by hedge fund managers, click on All-Asia Research Team - Hedge Funds Only.]
China’s economic stimulus package seems to be working. The nation’s economy grew at an annualized rate of 6.3 percent in the first quarter — growth entirely attributable to consumer spending, according to the NBS. Cui says he was initially skeptical of the government’s real GDP growth projection of 8 percent for 2009 but has since become a believer.
So have many investors. Asia ex-Japan funds attracted nearly $7 billion in net inflows in the first five months of this year, according to Cambridge, Massachusetts–based EPFR Global, with funds focused on China leading the pack. Investors need insight into the market segments likely to be the most profitable, and hedge fund managers say the analysts who provide the best guidance can be found at Citi, which tops this year’s ranking of Asia’s best analysts. The Alpha ranking recalculates the results of our sister publication Institutional Investor ’s 2009 All-Asia Research Team survey — which polls a broad cross-section of money managers — using only votes from hedge funds.
Citi, which tied for first place with Goldman Sachs (Asia) in 2008, is this year’s undisputed champion, claiming a total of 22 team positions, two more than last year, including eight first-team positions, double its number in 2008. Nipping at Citi’s heels is UBS, which rises from third place. The Swiss bank wins 21 positions, five more than last year, including two first-place finishes, the same as in 2008.
The biggest mover is BofA–Merrill Lynch, which zips from seventh place last year to tie with Goldman Sachs for third place; the firms capture 19 positions each. In fifth place is Credit Suisse, with 18 team positions, enough to raise its overall standing by one slot.
Citi’s Anil Daswani leads his team to a first-place finish in Industrials thanks in part to calling clients’ attention to companies likely to benefit from the Chinese government’s economic stimulus package, which allocates $200 billion a year over ten years for infrastructure spending, nearly half of which is earmarked for the transportation sector. Key projects include $24 billion to build a high-speed passenger rail line from Beijing to Guangzhou, $22 billion for freight rail lines in Shanxi province and $17.6 billion for a passenger rail line across northwest China.
Among the companies the Hong Kong–based Daswani, who also leads the No. 2 team in Hong Kong and the No. 3 team in Conglomerates, has been recommending is New World Development Co., a manager of commercial properties in China. New World is attractively valued, he says, after a massive sell-off amid general market turbulence last fall. The company, which is headquartered in Hong Kong, stands to gain not only from rising consumer spending in China but also from its operation of toll roads, cargo terminals and other infrastructure entities. The stock skyrocketed 85.8 percent in the first five months of this year, from HK$7.86 to HK$14.60, outpacing even the 26.3 percent gain of Hong Kong’s benchmark Hang Seng index over the same period.
Kelvin Koh, who guides his Goldman Sachs team to No. 1 in Oil & Gas (and co-captains the No. 2 team in China), maintained a “conviction buy” on China Petroleum and Chemical Corp. — Sinopec — from mid-September through mid-November. Their reasoning was that the company, China’s biggest producer of ethylene, would be (in analyst-speak) “a beneficiary of downstream margin recovery and potential pricing reform.” It was a good call. Koh, who works out of Hong Kong, reports that the stock outperformed the MSCI all-country Asia-Pacific energy index by 20.7 percent during that two-month window.
Another Goldman analyst who pilots a No. 1 team, Thomas Kim, let caution guide some of his most notable coverage of the Transportation & Infrastructure sector. The team took a skeptical view of the container-shipping industry in July 2007 and maintained it through 2008, a position the Hong Kong–based Kim says stemmed from “the anticipated downturn in global growth amid an already oversupplied containership market.” Kim’s group put sell orders on Hanjin Shipping Co., Neptune Orient Lines and Regional Container Lines on January 1, 2008, and maintained them through December 2008. The stocks tumbled by 54.2, 71.6 and 78.4 percent, respectively, last year.
Of course, China isn’t the only muse of investment advice in Asia. More eyes have turned to India of late, where credible estimates — including those from the International Monetary Fund — put the projected annual rate of growth at 4 to 5 percent. Mumbai-based Nilesh Jasani, who captains the Credit Suisse squad that captures the crown for its coverage of India, says general national elections in April and May that forced a changing of the guard also eased big-investor fears, resulting in “a large amount of capital flowing into India.” In May alone, $5 billion was invested in India from abroad, Jasani estimates. That compares with a total outflow of $15 billion in 2008.
Bhuvnesh Singh, pilot of Credit Suisse’s top-ranked troupe in Technology/IT Services & Software, also focuses on India. The Singapore-based Singh says his best call came late in the year, when he endorsed the sector as a whole. “Infosys was our top pick, and it performed better relative to other stocks in the sector,” he notes. Shares of Infosys Technologies, which is headquartered in Bangalore, surged by 34.2 percent from late November through the end of May, compared with 12 percent for the sector.
China, nonetheless, remains the focus of most investors’ attention — and justifiably so, according to Denise Chai of BofA–Merrill Lynch, who steers the No. 1 team in the Consumer sector. “We believe the leading Chinese consumer companies deserve to trade at a premium because few sectors globally can offer the consistency of visible growth over the long term that the China consumer sector can,” says Chai, who is based in Singapore. “Incomes are rising, household leverage is low, the single-child adult population of spenders is growing, urbanization continues, and government interference is low.”
That sentiment was echoed in a May meeting between investors and three panelists from the firm: Cui, who leads the top-ranked team in China coverage, and economists Timothy Bond and Ting Lu. The BofA–Merrill Lynch strategists described their view as “fairly optimistic, expecting China’s ample policy willpower and firepower to underpin an accelerating path of growth over 2009, with no big slowdown in 2010.”
Cui cites the following as evidence of China’s vitality: “Raw-materials imports have been very strong. Take iron-ore imports, up 33 percent year-on-year in April, to 57 million tons. That’s a historical high in China. Also, China became a net importer of steel in April, the first time on record.”
China is in a stronger position than most rivals, says Lu, who is based in Hong Kong: “There should be enough room for Chinese policymakers to step up stimulus measures because the ratio of public debt to GDP in China is only about 20 percent, which is way below the global average. So I expect no loss of momentum in 2009.
“We maintain the growth forecast for next year at 8.3 percent,” Lu says.
Beyond that?
“In the coming five years, around 8 percent to 8.5 percent.”
Cui says China must continue to bolster its homegrown consumerism. “I’m a firm believer in this transition from a global export-oriented economy to a domestic consumption-driven economy,” he explains. “Given its high savings rate, it definitely has the means to make that successful transition, but it will take quite some time. My belief is that we are going into a multidecade, credit-driven consumption boom in China.”
This boom is beginning at a time when many global banks, still recovering from massive credit-related losses stemming from the U.S.-led mortgage crisis, have laid off analysts and scaled back coverage.
“We have made a concerted attempt to drop coverage of ‘unprofitable’ stocks, where trading volumes do not justify full coverage,” notes Adrian Faure, Citi’s Hong Kong–based director of Asia-Pacific equity research. His firm has 74 analysts covering the region, down from 75 one year ago, and they follow 650 Asia ex-Japan stocks, down from 725. “As markets recover we will gradually increase coverage again to a level of around 700,” he says.
This is not Faure’s first appearance at the top of a ranking; he previously won when he was with Merrill Lynch in Latin America and with Baring Securities in Asia. He says the biggest lesson he has learned over the years is that customer relations are vital and that the equity researchers must work with salespeople. “There must be a very, very close partnership,” Faure asserts. “It is hard to separate research from sales.”
UBS has 77 analysts covering 716 of the region’s stocks, according to Hong Kong–based Julian Pickstone, the firm’s regional head of equity research. That’s down from 84 analysts covering 774 stocks one year ago. To offset the cutbacks the Swiss bank has established relationships with other research providers. In November UBS acquired a minority stake in GovernanceMetrics International, which allows the bank’s institutional investors to use the New York–based corporate governance rating agency’s research, and in April it entered into a strategic alliance with U.K. investment bank Noble, which acquired Mumbai-based equity research firm Clear Capital last September. The agreement gives UBS clients access to Clear Capital’s research into small- and midcapitalization Indian equities.
CLSA Asia-Pacific Markets, which holds steady at No. 8, is the firm with the most analysts in Asia, 114, and they cover about 750 Asian stocks, roughly the same number as last year, according to Edmund Bradley, the firm’s Hong Kong–based head of research. A unit of French bank Crédit Lyonnais, CLSA has 19 offices in 15 countries.
“One of the reasons we have more analysts is that we remain fully operational in all markets — while maintaining full teams in the larger markets, we do the same for Thailand, Indonesia, Malaysia,” Bradley explains. “We remain committed to local coverage, and as a result we enjoy healthy market share — and that’s important when volumes slow.”
