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Jeff Yeh became one of this year's best-performing Chinese stock pickers by spotting a bubble in technology shares and selling before it burst. Now, he says it's time to look for bargains.
"Prices are more reasonable," said Mr. Yeh, whose Yuanta New China Fund has returned about 22 per cent this year, outperforming 99 per cent of Greater China equity funds tracked by Bloomberg. "The air in many bubbles has been squeezed out."
The Taipei-based money manager is rebuilding his holdings of Chinese technology companies after they turned from bull-market leaders into the biggest losers of the subsequent crash. While tech shares still have the highest price-to-earnings ratios among the country's 10 industry groups, valuations have almost halved from their peak in June.
As for the broader Chinese market, Mr. Yeh says government efforts to stabilize share prices will likely prove successful. He has positions in liquor and entertainment companies geared to the growing spending power of Chinese consumers, along with financial shares that stand to benefit from state support for the property market.
The Shanghai composite index has climbed for the past five sessions, the longest winning streak since July, amid speculation that policy-makers will increase monetary stimulus. Equity volumes have more than doubled from an almost one-year low on Sept. 30, while volatility has slipped from the highest levels since 1997. The benchmark gauge fell 0.9 per cent on Wednesday.
"Chances of the China stock market stabilizing are high," said Mr. Yeh, who oversees about $41-million (U.S.) in the Yuanta New China fund. Siasun Robot & Automation Co., China Merchants Bank Co. and Kweichow Moutai Co. are among the fund's biggest holdings, according to an October fact sheet.
Mr. Yeh's weighting in technology companies dropped to 7.3 per cent in June from about 16 per cent the previous month as the fund cut stocks including Guangzhou Hi-Target Navigation Tech Co. and Tencent Holdings Ltd., according to data compiled by Bloomberg. The fund's weighting in industrial companies also dropped, while holdings of health-care and financial firms increased.
For Hao Hong, the chief China strategist at Bocom International Holdings Co. in Hong Kong, recent gains in mainland shares are just a "technical rebound" that will probably end after a few weeks. Earnings at technology companies are unlikely to grow fast enough next year to justify current stock prices, he said.
The CSI 300 information technology index is valued at 30 times projected earnings for the next 12 months, down from 56 times in June, according to data compiled by Bloomberg. That compares with a multiple of 12 for the CSI 300 index of China's largest companies. The technology measure, which surged 136 per cent from the end of December through the Chinese stock market's peak on June 12, has since tumbled 44 per cent.
Technology shares tend to command a premium in China because the government is boosting spending on the industry as it seeks new sources of growth to offset a faltering industrial sector. In March, Premier Li Keqiang outlined an "Internet Plus" program to link Web companies with manufacturers. Authorities also plan to give foreign investors access to Shenzhen's stock market, the hub for technology firms, through an exchange link with Hong Kong.
While there's no start date set for the program, Hong Kong Securities and Futures Commission CEO Ashley Alder said at a conference on Tuesday that ground work for the link has been completed.
"We are adding some quality stocks," Mr. Yeh said. "There's no need to be too pessimistic."