Smaller firms considered good bets as 'they adapt to poor economy quickly'

 

Narongsak Plodmechai, senior executive vice president and chief investment officer at SCBAM, suggested that investors look at shares with small to mid-sized capitalisation in Japan, the United States, Europe or almost everywhere else, along with big-cap shares that are well prepared for the sluggish global economy.

“Small fish are eating big fish during the current slowdown in the global economy because big fishes are too big and too slow to cut costs that are higher than the growth of the market. 

Nevertheless, big fishes that have cut costs in advance or can run like small fishes should also be on investors’ radar,” he said.

On the other hand, SCBAM is underweighting Chinese stocks, despite expansion in its gross domestic product of more than 6 per cent – pretty good when compared with the rest of the world – since profits of its listed companies are expected to be low.

“Unfortunately, high or low GDP [growth] is not relative to the ups and downs of shares, therefore good economic growth does not automatically mean that stocks will rise,” he said.

“For me, stocks rise because listed companies’ profits are rising, as prices cannot stay still when profit is increasing, and stocks fall because there is no profit, so the prices will eventually have to come down.” 

He explained that around half of China’s shares were from the banking sector, which is not expanding at 6 per cent at the moment. Meanwhile the country’s competitiveness in terms of low labour costs has been tarnished as wages have more than doubled in the past five years.

“Increased wages mean higher production costs, and this coupled with stagnant inflation means companies’ profits have fallen, especially in labour-intensive sectors, so any profit that ties to commodities-related manufacturing is lower as a consequence,” Narongsak said.

“Meanwhile, most of China’s orders are made in advance while production costs have risen, so that would lower their profits even further.” 

He also noted that the overall increase in wages in China had not resulted in a corresponding rise in domestic consumption because much of the country’s new wealth was spent on imported products.

“Market intervention via freezing trade activities in the capital market would hurt Chinese stocks even more because it could trigger a massive outflow. Market intervention also creates underground activity, as it results in market  [inefficiency] and mis-pricing, which will cause a chain reaction,” he said.

“If you say that Chinese stocks are more attractive than Japan’s at the moment, then I have to say that I cannot see it, since I cannot see if their earnings will increase, and I do not believe that their earnings per share will expand because of GDP growth.” 

Margin loans, market intervention, and moderate valuation while one stock can have two prices mean there is no need to rush into Chinese shares, and exiting would be better advice, he said.

Nevertheless, he added that if investors are looking at the long term, since China has great prospects for economic growth in the future, then he recommended H-shares (on the Hong Kong Stock Exchange) more than A-shares (listed on the Shanghai exchange, which are largely available only to domestic investors), since they are cheaper.