Sector rotation was one of the highlights of the stock market adjustment earlier this year. A significant downward adjustment finally appeared on the growth stocks after a period of prolonged gains while some cyclical value stocks experienced a long-overdue rebound, thereby narrowing the valuation gap between growth and value stocks.
How should the investors evaluate growth stocks? There is no simple answer to this, because it relies on the actual growth potential of the stock.
For example, there are negative impacts to some internet companies after the introduction of anti-monopoly law in China. Since the rise of these stock prices during the past two years was not solely based on profit growth, but also factored in the increase in valuation.
However, investment themes such as high-end manufacturing, robotics, automation and independent research and development still benefit from Chinese government policies.
Their growth potential remains strong and the only thing to pay attention to is whether an individual stock might be overvalued. During the market adjustments after the Lunar New Year, new economy stocks generally came under pressure, creating opportunities for investors.
In particular, some companies still delivered higher-than-expected results, reflecting that their fundamentals are still good.
Value stocks have growing appeal. In recent months, the prices of international commodities — such as copper and iron ore — have risen as the global economy has started to recover.
This, in turn, stimulates demand for raw materials and shipping. At the same time, the ongoing epidemic has caused global supply chain interruptions from time to time.
As a result, it is difficult for supply to keep up with the changing demand, causing prices to rise dramatically.
No hidden danger of soaring inflation
The importance of growth is always emphasised and we constantly work to identify the stocks with the best growth potential. However, in recent years, it has been important to make the investment portfolio more balanced.
Instead of just focusing on the new economy stocks, we are putting more emphasis on recovery and cyclical stocks — including commodities, shipping and securities financial stocks — thereby diversifying portfolio risk.
In fact, besides being supported by core fundamentals, commodities are also buoyed by government policy.
In recent years, the Chinese government has vigorously implemented environmental protection policies to address pollution and climate change, restricting production capacity and the supply of many commodities. It has seen the producer price index for industrial products (PPI) continue to rise.
The National Bureau of Statistics of China announced earlier that the PPI in April rose 6.8% from a year earlier, its highest level since October 2017.
It is worth noting that the increase in costs did not translate into inflation and affect end-users. The China Consumer Price Index (CPI) only recorded 0.9% year-on-year growth during the same month.
The increasing use of online shopping and the emergence of various disruptive economic models have improved the efficiency of the global economy and absorbed some of the rising costs. Therefore, we have yet to see the hidden danger of rising inflation.
The Chinese government is not faced with urgency to tighten its monetary policy. Some analysts even expected that PPI will peak and fall in the second half of this year.
The People’s Bank of China maintains a moderate loose monetary policy, which has helped to both gradually dissipate the negative factors that plagued the market and stabilise investor sentiment. In recent months, foreign capital has continued to flow into the A-share market through the Stock Connect.
Anthony Wong is a portfolio manager with Allianz Global Investors
Photo: Bloomberg
