Analysts’ most-hated stocks are Hong Kong’s biggest winners

The Hong Kong Exchanges and Clearing building

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 percent this year, based on an average that’s weighted for market value, versus the 7.2 percent 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 percent in 2017, well ahead of the Hang Seng Index, which is up 8.3 percent.

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 percent 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. Data yesterday showed factory output and fixed-asset investment exceeded estimates for the first two months of the year. 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 percent 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 percent this year, just under half Cathay’s climb.

“People are just looking for opportunities,” said Brett McGonegal, chairman and chief executive officer at Capital Link International Holdings Ltd. in Hong Kong. Investors who came too late to the Hong Kong rally are searching for “other things and some of these are household names – Cathay, Tsingtao are very well known brands,” he said.

Cathay has rebounded 15 percent from last year’s low, even with analysts expecting the air carrier to report a 92 percent plunge in 2016 operating profit on Wednesday. Meanwhile, Tsingtao has benefited after Bloomberg News reported Danish beermaker Carlsberg A/S may purchase a stake. Kana Nishizawa, Bloomberg