Bets on underdogs may give high returns to investors

Betting on underdog stocks such as those of steel, cement and commodities producers may yield surprising returns for A-share investors in the coming year. For, policy stimulus to rescue these traditional industries that are struggling amid the slowing economy, may exceed market expectation, according to several analysts.

After being ignored by investors due to their poor corporate prospects and pressure to trim overcapacity, stocks of steelmakers, cement producers and glass manufacturers began to show signs of a turnaround last week.

A gauge that tracks producers of building materials in the A-share market advanced to a nearly one-month high of 2316.55 points last week, buoyed by the government pledge to take further steps to support the economy, including the struggling property sector, a main contributor to GDP growth.

"The government stimulus, including trimming the inventory of unsold houses and subsidizing rural residents to purchase homes in cities, helps improve investors' expectation for the property market, which in turn offers a boost to the upstream industries," said Ji Yongfeng, an analyst at Nanjing Securities Co.

"If unwinding overcapacity and real estate destocking proves to be effective, it will help turn loss-making companies into profitable ones," Ji said.

At the recent Central Economic Work Conference, the country's most important year-end meeting to set the tone for reforms in the coming year, the top leadership highlighted the so-called supply-side reform, which often refers to policy measures for improving industrial efficiency and productivity while seeking to reduce corporate costs through various measures, including tax cuts.

Policymakers in Beijing laid out five priorities for the supply-side reform: unwinding overcapacity, destocking in the property market, deleveraging to avoid more credit defaults, lowering corporate costs, and increasing effective supply by offering more support to companies for technology upgrades and innovation.

"In the property market, we expect more supporting measures to be rolled out in 2016," Chang Jian, chief China economist at Barclays Capital, said in a research note.

"These could include relaxing residency registration requirements to encourage demand from rural migrant workers, window guidance to lower house prices and inventory levels, moves to foster the property rental market, and rolling back some outdated administrative controls," she said.

Meanwhile, aggressive buying in property stocks by cash-rich insurance funds could also lift the stock prices of the property sector substantially, prompting investors to reevaluate the investment opportunities in related industries like material producers, which for long have been depressed by their poor outlook, analysts said.

Huang Shitao, an analyst at Industrial Securities Co, said that valuations of material producers like cement companies have dropped to attractive levels, and institutional investors are underweight on many of them.

"They will likely rebound with the rally in property stocks on market anticipation of more stimulus," Huang said.