Most-hated stocks are HK’s biggest winners

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.1 percent in early trade while Japan's Nikkei bucked the trend and dipped 0.3 percent. (Investors look at an electronic board showing stock information at a brokerage house in Shanghai, China, March 7, 2016. - REUTERS)

HONG KONG: When it comes to this year’s surge in Hong Kong stocks, it paid to root for the underdog.

Equities with the lowest ratings from analysts have driven the market’s Asia-leading gains in 2017, streaking ahead of shares showered with buy recommendations, data compiled by Bloomberg show. While this is frustrating for stock strategists – and the investors who follow their advice – it reflects a pivot in the market’s focus as China’s economic recovery solidifies.

Bloomberg assigns analysts’ recommendations a value from one, a sell, to five, a buy. These are then averaged to create a consensus rating.

Hong Kong-listed stocks covered by at least five analysts with a consensus rating of less than three have climbed 11% this year, based on an average that’s weighted for market value, versus the 7.2% advance in equities with unanimous buy ratings, the data show.

Take Cathay Pacific Airways Ltd. Hong Kong’s marquee airline has 15 sell recommendations and zero buys as increased competition on Asian routes crimps earnings, but it’s climbed 14% in 2017, well ahead of the Hang Seng Index, which is up 8.3%.

Likewise, Tsingtao Brewery Co. The beer maker has struggled as China’s slowdown in the wake of the global financial crisis priced out lower income drinkers – it has 10 sells to one buy. Still, Tsingtao’s Hong Kong stock has soared 23% in 2017 after posting its biggest advance since September last month.

In 2016, the reverse was true, with lower-rated Hong Kong stocks falling as those with perfect buy credentials climbed.

Strength in manufacturing to producer prices has added to the picture of Chinese economic health in 2017. That’s helped last year’s market laggards catch up, said Vincent Chan, head of China macro research at Credit Suisse Group AG in Hong Kong.

“Usually companies that get all the buy ratings are companies that enjoy structural growth – that means irrespective of the economic dynamics their earnings are growing,” he said.

“When the economic cycle starts to turn, like this year, growth no longer becomes a scarce commodity. These companies that nobody is holding, all of the sudden they deliver growth.”

Analyst love hasn’t been able to staunch the losses in shares of WH Group Ltd in 2017. The Hong Kong-based company, owner of the world’s largest pork producer, has fallen 4.2% this year, even with all 12 analysts covering the stock rating it a buy. Universal Medical Financial & Technical Advisory Services Co is also a unanimous buy, and has gained 6.7% this year, just under half Cathay’s climb. — Bloomberg