China Stock Traders Most Defensive in Years on Growth Doubts

(Bloomberg) -- China's army of stock investors are taking cover.

They've been loading up on companies with earnings that are less reliant on economic growth, and ditching banks and oil producers. Gauges of consumer staples and health-care shares have surged to the highest levels relative to the CSI 300 Index since at least 2013 in recent days, while a measure of financial companies is near the lowest since November 2015. A crackdown on leveraged trades by regulators has only made investors more defensive.

"People are turning their eyes to booze and drugs amid waning growth momentum in the economy," said Hao Hong, Bocom International Holdings Co.'s chief strategist in Hong Kong. "Low-beta defensive plays outperform in a risk-averse market as the companies provide better earnings growth and cash flow. The rally has a further leg to go, at least in the second quarter."

Recent data appear to support such caution. Manufacturing gauges fell in April, signaling headwinds for an economy that accelerated in the past two quarters. Iron ore, considered a proxy for the nation's infrastructure spending, entered a bear market last month amid a near-record mountain of stockpiles. The dour sentiment helped send the CSI 300 to its lowest level since Feb. 17 on Tuesday.

Liquor makers have been among the biggest beneficiaries of the shift to so-called defensive shares. The consumer staples gauge has rallied 15 percent this year, and closed at its highest level since June 2015 on Thursday. Luzhou Laojiao Co. and Wuliangye Yibin Co. have jumped at least 30 percent to lead gains, followed by Yonghui Superstores Co. Utilities and health-care shares have climbed more than 8 percent, compared with the CSI 300's 3.1 percent advance.

There are signs of caution filtering into these industry groups as valuations swell. The consumer staples index slumped 3.1 percent in the two trading days through Tuesday, while the health-care index retreated 1.8 percent. Both measures trade at least 12 percent above their average multiple over the past five years, using price to estimated earnings. The consumer staples index snapped its two-day loss Wednesday with 0.5 percent rise, the biggest gainer on the CSI 300 Index which slipped 0.4 percent at close. Health-care plays were little changed.

Crowded Trade

For Credit Suisse Group AG's Hong Kong-based strategist Chen Li, sectors such as liquor and home appliances are getting crowded.

"I'm concerned; these stocks have had some decent gains, but it's not going to be a money-making situation for all," said Chen. "With everyone flocking into such investments, there's a risk of a selling stampede should someone start to pull out and trigger a price correction."

Still, Hengsheng Asset Management Co. says the government's focus on reducing risk in financial markets will add to investor perception that consumer and health-care shares offer safe havens.

China's regulators have unveiled a raft of measures over the past month to curb leverage, boost transparency and prevent excessive speculation. In one sign that the reform drive has further to run, President Xi Jinping gave it a stamp of approval by presiding over a rare meeting with top financial regulators last week. The crackdown spurred a selloff in the broader market, with gauges of energy, financial and industrial companies being hardest hit over the course of April.

"Risk appetite drops on tighter scrutiny," said Dai Ming, fund manager at Hengsheng Asset Management in Shanghai. "Investors will still need something to trade on after the crackdown on speculative trades, and their choices naturally go to steady bets like consumer stocks."

--With assistance from Ryan Lovdahl

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Sarah McDonald

With assistance from Amanda Wang