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January 12, 2017

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Stocks favored as bonds lose out

STUNG by a late-2016 fall in bonds, Chinese investors may switch to shares this year in the hope of better returns as the economy recovers and as a hedge against rising inflation and tighter monetary policy.

That would be a dramatic reversal from last year, when assets under management for bond funds surged 142 percent to 1.93 trillion yuan (US$278 billion), while equity and balanced fund assets dropped 17 percent to 1.99 trillion yuan, according to data from Chinese consultancy Z-Ben Advisors.

“Bond investors face the triple whammy — rising inflation, improving economy and tightening liquidity,” said Xie Yi, executive director at First Seafront Fund Management Co.

While China’s main stock index fell 12 percent last year, yuan-denominated bonds had been moving the other way, with benchmark 10-year bond prices rising enough to knock 200 basis points off yields from mid-2014 to October last year.

But a two-month bond sell-off late last year sent yields up again, reclaiming nearly a third of the gains, as concerns over capital outflows and a falling yuan spooked investors.

Gu Weiyong, chief investment officer at Ucom Investment Co, who slashed his bond holdings at the end of last year, said “yields will likely rise further, along with inflation.”

Inflation in China has been picking up in line with the rally in commodities, feeding off government’s economic stimulus and restructuring efforts. In September, a rise in producer prices ended nearly five years of deflation, and they surged 5.5 percent in December.

The change in perception is already impacting the sales of bond funds, which were popular last year. With interest waning, a number of fund houses, including China Asset Management Co, GF Fund Management Co and Wanjia Asset Management Co, have extended the subscription periods for new bond funds over the past month.

Chen Liming, head of the wealth-management unit at Everbright Securities Co, said stocks look increasingly attractive. “The economy has bottomed out, and listed companies’ profitability is improving, so we should allocate more to equities,” Chen said.


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