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Banks were hit hard, but a number of other sectors responded well, and a general market upturn in China would not be surprising based on the data so far, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Yesterday, I wrote that market reaction to the interest-rate cuts by the People’s Bank could cut one of two ways. Either:

  • investors could bid up Chinese stocks, because China’s central bank had escalated its stimulus of the flagging Chinese economy
  • investors could sell Chinese stocks, on worries that the move by the People’s Bank indicated that China’s economy was slowing more quickly than expected

The votes came in overnight, and on the surface it looked like Chinese investors went for Option No. 2. Hong Kong’s Hang Seng index was down 0.94%, and the Shanghai Composite Index fell 0.51%.

But if you take apart the indexes and look at the winners and losers, a more complex pattern emerges that’s part Option No. 1 and part Option No. 2.

If that pattern holds up on Monday—after the Saturday release of May data that is almost certain to show China’s economy decelerating more quickly than a month ago—I think investors can identify likely winners from China’s increased stimulus efforts and start buying, slowly, some of those stocks.

What jumps out at me if I look at the winners and losers in the Hang Seng index last night is how the losers are dominated by China’s big banks. Five of the six biggest losers are banks.

The list starts with Industrial and Commercial Bank of China (1398.HK in Hong Kong and IDCBY in New York), down 4.91% on the day, and continues with Bank of Communications (3328.HK in Hong Kong and BCMXY in New York) down 4.6%, China Construction Bank (939.HK in Hong Kong and CICHY in New York) down 4%, Bank of China (3988.HK in Hong Kong) down 3.16%, and Bank of East Asia (23.HK in Hong Kong and BKEAY in New York) down 2.7%.

Since shares of China’s bank make up 22% of the market capitalization-weighted Hang Seng index, it isn’t remarkable that the index itself fell, considering the plunge in the price of shares in these banks.

What is interesting—and potentially important—is that the index went down just 0.94% on the day despite the plunge in these banks—because other parts of the index climbed steeply. What went up?

  • Non-bank financials, such as Ping An Insurance Group (2318.HK in Hong Kong and PNGAY in New York) and China Life Insurance (2628.HK in Hong Kong and LFC in New York), up 1.97% and 1.38% respectively.
  • Energy producers, such as China Resources Power Holdings (836.HK in Hong Kong and CRPJY in New York) and China Shenhua Energy (1088.HK in Hong Kong and CSUAY in New York), up 3.1% and 2.01% respectively.
  • And property developers, such as China Overseas Land (688.HK in Hong Kong and CAOVY in New York) and China Resources Land (1109.HK in Hong Kong and CROJF in New York), up 2.49% and 2.05% respectively.

I think shares of China’s big banks went down because the decision to allow banks to undercut the official lending interest rate by 20% and to exceed the official deposit interest rate by 10% raised fears that banks would compete for customers. That would cut into the fat profits that China’s banks have earned from regulated rates.

And I think the shares of non-bank financials, energy producers, and property developers rose because investors saw, rightly in my opinion, this interest rate as a sign that the Chinese government was getting much more active in its efforts to stimulate the economy.

I’d like to see if the reaction Monday to this weekend’s almost certainly dismal economic data bears out my thinking on those patterns. If we do get relative outperformance from economically sensitive sectors, like those that climbed overnight last night, then I think I’d be willing to slowly increase my bets in these sectors.

Some stocks I’d recommend you look at, because they’re in the right sectors and because they trade with decent liquidity in New York would include Ping An and China Life, as well as Aluminum Corp. of China (ACH), Home Inns and Hotels Management (HMIN), and China Eastern Airlines (CEA). Home Inns and Hotels is a member of my Jubak’s Picks portfolio.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

Tickers Mentioned: Tickers: HMIN, CEA, IDCBY, BCMXY, CICHY

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