Investors of Kweichow Moutai Co. have been selling their shares faster than any other time in over two years, sending a warning to a market that relies heavily on a handful of large caps. The biggest stock listed in mainland China has lost about $78 billion since the opening of onshore markets after the Lunar New Year holiday. The latest 4.6% drop takes the five-day decline to 15%, the biggest depreciation rate for such a period since October 2018, with Moutai rallying 30% this year through its February 10 record close.
Momentum trades seem to be cracking after the CSI 300 Index briefly broke its 2007 closing peak. Traders in China were worried about were a lack of market breadth before the holiday and extreme valuations for some of the most-loved stocks. About 10 companies accounted for 50% of the returns on the benchmark, including Moutai, as foreign investors and domestic mutual funds compound the problem with the purchase of the most liquid megacaps.
“This is the beginning of the end for baijiu’s outrageous valuations and the mark of a massive shift to value stocks,” said Dong Baozhen, fund manager at Beijing Lingtongshengtai Asset Management. The big baijiu gains the past year “have become a prisoner’s dilemma – whoever sells first wins.”
Triggers for the reversal include signals on tighter monetary policy from the apex bank. The People’s Bank of China is withdrawing liquidity from the system, with local media running a front-page editorial stating that China’s economic recovery is creating the conditions for the central bank to “normalize” monetary policy.
The CSI 300 was 2.1% lower as of Wednesday’s lunch break, as the consumer staples sector that includes baijiu lost 4.1%. Health care, which had also been among the market’s best performers until the holiday, also lost 3.2%.
Other makers of baijiu, a popular liquor in China, were among the top losers on the CSI 300 in the past five days, with Shanxi Xinghuacun Fen Wine Factory Co. dropping 23% and LuzhouLaojiao Co. losing 21%. The Securities Times newspaper have also listed some concerns around the baijiu trade. The worries include record-high valuations, overly heavy positioning by institutional investors, and the demise in popularity of the spirit among the younger generation.
Zhang Kun, one of the leading funds managed by a star manager, also suspended new orders in the baijiu sector. The industry accounted for about 40% of the fund’s holdings, according to a fourth-quarter filing, with Moutai among the top positions.
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