There are select diamonds in the rough to be found in Hong Kong's current depressed market.  Photo: Chow Sang Sang

Translated by Andrew Vanburen from a Chinese-language piece in Sinafinance by Gao Juan of Victory Securities

NOT EVERY downturn produces bargains.

Some firms genuinely deserve to ride the pine. But others are in fact ripe for the picking.

It’s time to start shopping for quality counters that have been unjustifiably pulled down in the ongoing downturn.

Two sectors in particular – pharmaceuticals and power generation – present more than their fair share of attractive options with both enjoying a reasonable degree of recession-proof immunity.

It’s important for investors to not simply be scraping the bottom for the cheapest stocks, but rather to scrutinize their intrinsic value and future potential more so now than perhaps ever before.

That’s because when the tide finally rises, not all counters will be caught up in the surge and some may in fact be destined to reside on the seabed for much longer than most investors would normally tolerate.

The economy continues to struggle and market sentiment remains skittish at best.

Gao Juan, Victory Securities

Although inflation growth figures for June came in somewhat lower than expected, PRC-based stocks especially -- in the property and resources sectors -- saw across-the-board selloffs after the CPI and PPI data was made public.

The net result was an over 300 point fall in the benchmark Hang Seng Index.

And with afternoon trading impacted by lower openings across Europe, the final close in Hong Kong was nearly 2% lower by the end of the day.

Not only did this once again demonstrate the heavy (some would say overburdened) weighting of real estate on the mainboard Index, but also clearly reveals the inescapable influence that events in the EU have on Hong Kong’s capital market.

Even with the news from Beijing and the European Union, turnover for Monday fell by 14% from Friday to just over 42 billion hkd.

Property stocks led the bear run, falling 2.1% on the day, with industrial counters close behind with a 1.6% selloff.

Quality pharma shares are in demand. Photo: NT Pharma

Meanwhile, financial institutions finished the day 1.3% lower while public works counters were down around 0.3%.

The reason for mentioning these four sectors is their heavy reliance on credit availability, and despite the recent rate cut – the second in a month – investors are still worried about either the cash situation or possible overleveraging.

In addition, China’s PPI – one of the best gauges of industrial activity in the country – fell by 2.1% year-on-year in June, hitting a 32-month low.

This was certainly another culprit in the selloff of leading industrial shares.

Furthermore, the 2.2% rise in inflation last month in Mainland China hit a two-and-a-half year low, thus increasing anxiety over the future profitability prospects for PRC-based companies

Also, preliminary reports suggest the PRC’s economy grew by a lower-than-anticipated 7.6% in the second quarter, the worst performance in three years.

With this confluence of uninspiring news, it’s no wonder the benchmark Index is ailing.

In this market climate, I would suggest investors look for unappreciated counters in the pharmaceutical and power generation sectors.

Not only are they more or less immune from external demand, but they enjoy active support from Beijing.

Other than that, China Citic Bank (HK: 998; SHA: 601998) is looking like a good choice at present among listed financial counters.

See also:

MUSICAL CHAIRS: How New CFO Impacts HK Listco

UNDEREXPOSED: German Camera Icon Leica Focusing On HK IPO

BAD APPLES: Hong Kong’s Listing Laggards

HK SHARES: Trash Already Tossed To Curb

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