Growth stocks see rebound

The Chinese government's emphasis on supply-side reform and raised expectations for an economic downturn are cited for the rebound, UBS says.

The Chinese government's emphasis on supply-side reform and higher expectations for an economic downturn have led to a rebound of growth stocks, UBS Securities said in its latest liquidity report.

Since late February, China's Nasdaq-styled ChiNext has rebounded by over 10 percent, with institutional investors preferring growth stocks whose valuations matched earnings, such as small and medium size enterprises in new-energy vehicles or media, the report said.

"The ChiNext's rebound was partly due to the Government Work Report's setting the tone that supply-side reform will gradually shift focus to innovation," said Gao Ting, head of China Strategy at UBS Securities.

Expectations of an economic downturn were raised after the government managed to control the fiscal deficit, which made innovative growth stocks more appealing. China's intention to accelerate the A-share placement of US-listed Chinese stocks and the looser liquidity conditions year to date also lifted the growth stocks.

The US-listed Chinese stocks' return to the A-share market via the Chinese Depositary Receipts, which allow foreign companies to have both Chinese institutional and private investors own their stock, could gather pace, according to the report.

Based on current market value, the four leading Chinese Internet companies, including Tencent, would raise 370 billion yuan (US$58.5 billion) via a 5-percent additional issuance in the A share market, which could be equal to 20 percent of the total funds raised in the market in 2017.

"Although this institutional reform will likely help boost the market's risk appetite in the near term, we believe volume and revenue growth should also be considered when valuing US-listed Chinese stocks, rather than private equity alone," Gao said. "Once these new stocks are placed, low-quality stocks will likely see a steady derating."

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