Cyclical stocks lead Chinese gains at start of 2018 amid bets on economic recovery

Chinese companies that rely on the strength of the economy for their main business revenues staged a comeback on the first day of trading in 2018, as traders bet that an economic recovery will continue and boost the sector's valuations.

Energy producers, property developers and banks led the charge among these cyclical companies in mainland markets at the start of the new year, with Shanxi Lu'an Environmental Energy Development, Gemdale and Bank of Ningbo rising almost 4 per cent. Citic Securities, the nation's biggest listed brokerage, recommended buying banking and property stocks, predicting the ratio of non-performing loans will decrease and home sales by major developers will exceed expectations this month.

A strong reading of China's purchasing managers' index for the manufacturing industry, and relatively low valuations have boosted the risk appetite for cyclical stocks among investors, said Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai.

"The market's risk appetite is rising," he said. "The PMI is pretty good so the market is eyeing a new round of economic recovery, and the valuations of the cyclical stocks are not stretched, so the rise in the sector has fundamental support."

The PMI for China's manufacturing industry was at 51.6 for December, above the dividing line of 50 between contraction and expansion for a 17th straight month, according to data released by the statistics bureau on the last day of 2017.

Cyclical stocks were the underperformers relative to the broader market in the second half of last year. Gains in financial and energy stocks lagged those on the CSI 300 Index during that period, as investors snapped up consumer companies including makers of baijiu to seek hedges against the uncertainty of economic growth.

Financial companies and property developers rose 9 per cent in the second half of 2017, and energy producers added 4.5 per cent, lagging a 9.9 per cent gain in the CSI 300.

Banks, real-estate firms and energy producers are the cheapest among the industry groups on the CSI 300 Index, according to data compiled by Bloomberg.

Among the biggest winners on Monday, property developer Gemdale surged 9.4 per cent to 13.82 yuan and RiseSun Real Estate Development jumped 8.6 per cent to 10.35 yuan. Shanxi Lu'an Environmental Energy, a maker of coking coal, advanced 7.4 per cent to 12.22 yuan and China Merchants Bank rose 2.1 per cent to 29.62 yuan.

Banks' profit growth may accelerate to 10 per cent this year because of improvement in net interest margins, according to Haitong Securities.

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