A regular income and long-term associated value are leading to increased risk appetite for the investments in China Energy sector and raking on the trend are the investors vested with the asset and its related pure-play funds. A clear comeback of the power and energy industry in the country is evident from the returns procured through it in the last six months.
Past half a year has seen, State-owned large-cap equity, China Shenhua Energy appreciating 18.76% on the Hong Kong Exchange with a market cap of 641 billion dollars and following the suit are the NYSE listed ADRs of various other heavyweights like Petro China and Sinopec Shanghai, which have given out short-term gains of 16%-21% alongside managing a yield payout of more than 3%.
Global X CHIE ETF, which is a pure play on the class, has posted a return of 23.41% during the same time. The fund manager, which is known for introducing several BRIC and emerging economy based ETFs have also confirmed CHIE’s outperformance in contrast to its peers and the benchmark returns.China is a large nation with an extensive demand for energy as it is stated to be the world’s largest energy user.
The power production and distribution along with infrastructure and finance industry is an economic mainstay and will be the prime sectors attracting investor attention on the Dragon’s comeback trail. At a time when Shanghai Composite Index seems to be stable and bottomed out, lower valuation of the energy stocks and their even lower PE ratio figures make up for a sound investment case.
Participants looking to diversify with these Asian energy domains should note that Shanghai Index is now operating at PE numbers of 11-13; a very safe figure considering that the historical data gives an average figure of 20+ and relevant PE levels during the 2008 crash in the Chinese capital markets were hovering around 41% for the composite benchmark.
The Government has a bright plan to encourage private investment into the industry, to regulate this sector and speed up infrastructure investment and overall economic growth (Thereby reducing the possibility of losses in this sector mainly caused due to the subsidies, state monopolies and state control on the energy prices). Majorly dominated by the state firms, the conventional oil, gas and coal production is a big moneymaking business.
The policymakers are sincere in promoting the clean and green energy stance through technologies such as batteries for solar storage. But the high dependence on coal could prove to be a hindrance in the way of the previous plan. Therefore calling in for cleaner forms of energy such as hydroelectricity, solar and wind power has been the latest norm.
The shale gas sector especially has seen some aggressive development, and today China owns 20% of the world’s total Shale gas reserves. The government believes that success achieved in this sector could limit the country’s dependence on foreign oil and gas imports.
Private money is encouraged in the following areas – The exploration and development of energy resources, oil and natural gas pipeline construction, coal processing, oil refining and creating new and renewable energy sources. However solar energy still lags behind when it comes to economic viability. Thus most Solactive Indexes controlled. Equity traded funds have reduced the solar stocks’ kitty from 10% to 6.5%. This will prevent the diminishing returns on such funds.
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