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Banks down, spirits up: Coronavirus reshapes China stock values

Consumer goods and technology edge out old economy shares related to investment

ICBC lost its crown to liquor giant Kweichow Moutai. (Nikkei montage/Reuters)

HONG KONG -- After more than 12 straight years as China's most valuable stock, Industrial & Commercial Bank of China lost its crown to liquor giant Kweichow Moutai in June. It is just one example of the changes shaking the world's second-largest economy as the coronavirus pandemic fuels a shift in investor interest.

In the first six months of the year, the old economy sectors -- finance, industry, property and energy -- have all ceded ground to consumer staples, technology and health care, which have attracted customers and investors alike amid lockdowns to contain the virus.

The shift in investor preference is broadly in line with global trends and comes despite signs that China's economy is returning to normal after the country managed to contain the virus. More importantly, it is an indication of a long-awaited rebalancing of the economy toward domestic consumption.

"It is one of those pivotal moments where the sector leadership is changing in tandem with the economy," said Frank Benzimra, head of Asia equity strategy at Societe Generale. "We are seeing greater weighting towards consumption and a move away from investment-led sectors. The trend has only been amplified by the coronavirus outbreak."

ICBC and its main rivals became China's most valuable companies from around 2007 as the country moved away from a commodity-intensive development model that powered PetroChina into the world's first trillion-dollar company.

By 2016, technology giants Alibaba Group Holding and Tencent Holdings snatched the crown, albeit through listings in New York and Hong Kong, respectively.

Stocks that gained the most in the first half of the year include Kweichow Moutai, the maker of Mao Zedong's favorite drink, baijiu, and rival Wuliangye Yibin, whose shares rose by a fourth, along with Jiangsu Hengrui Medicine, which climbed 26%, and Foshan Haitian Flavouring & Food, up 39%. In contrast, the largest banks -- ICBC, Bank of China, China Construction Bank and Agricultural Bank of China -- have lost between 6% and 11%. The CSI 300 index ended the first half 1.6% higher.

Internet companies have also had a strong first half. Tencent has risen 30%, while game developer NetEase has gained 41%. Online retailers Pinduoduo and JD.com, both listed on Nasdaq, have gained 131% and 69%, respectively. Alibaba, by contrast, has risen just 1.4% this year amid concerns of intensifying competition from those two rivals and others.

The financial sector, meanwhile, has been battered by fears of rising nonperforming loans and reduced profitability as Beijing pushes for lower borrowing costs to bolster the economy, a move set to erode the sector's 1.5 trillion yuan in profits this year.

But consumption is still on its way to becoming a key economic driver, experts say.

"Consumption has been growing at a steady 8% to 9%, while the economy itself is decelerating and all policies are supportive of continued growth," said Eric Moffett, a portfolio manager at T Rowe Price in Hong Kong. "While it will become more and more important as a share of gross domestic product, it is not yet the same level of the United States as primary driver of the economy, and so infrastructure and property will also remain important."

And there are challenges to the trend, at least in the short term, namely fragile consumer confidence and the rising valuations of technology, health care and consumer staple stocks.

Per capita disposable income fell 3.9% on the year to 8,561 yuan ($1,209) in the first quarter, the first fall since reporting began in 2013, data from the National Bureau of Statistics showed in April, leading to fears of a slump in consumer spending.

Meanwhile, valuations have surged. Consumer staples and technology stocks on average trade at 29 times their trailing 12-month earnings, compared with eight times for financial stocks and 14.5 times for the CSI 300 index.

"While the earnings outlook for tech and consumer staple stocks are bright, any disappointment could lead to a sell down," Benzimra said.

Investors are betting policymakers focus on job creation and income security to boost the economic recovery, increased reliance technology amid social distancing and demand for health care will provide tailwinds for related stocks.

At the National People's Congress in May, Premier Li Keqiang delivered an annual policy address that laid out a renewed focus on maintaining employment and investment. Authorities will aim to keep the urban unemployment rate, which officially reached 5.9% in March, below 5.5%.

"China's redirection to a tech-driven growth model and the rising income of domestic consumers, is behind the rising importance of non-financial stocks in China's CSI 300 index of Shanghai- and Shenzhen-listed stocks," said Shanghai-based Chaoping Zhu, a global market strategist at J.P. Morgan Asset Management.

"After four decades of high-speed growth, China now has a large economic scale, which can effectively support domestic research and development activities," he added. "Hence the technology sectors such as electronics, biotech, etc. are now playing a more important role in both the economy and the stock market. Consumers also have higher disposable income, which has prompted higher demand for high-tech consumer products and health care services."

While the pandemic will be contained, Zhu said, the structural shift to technology, health care, consumer and tech-driven financial services will remain long-term investment themes for China.

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