China funds trim suggested stock, cash allocations, raise bonds

By David Lin and Clement Tan

SHANGHAI/HONG KONG (Reuters) - Chinese fund managers trimmed their suggested equity and cash holdings for the next three months, while raising bond allocations on fears that a rally in high-growth stocks has outpaced fundamentals, according to a Reuters poll.

Average recommended stock weightings in a portfolio fell to 83.8 percent in September from 85 percent a month earlier and to 9.9 percent from 10.7 percent for cash, while climbing to 6.4 percent from 4.4 percent for bonds, according to a monthly poll of eight China-based fund managers conducted last week.

"There is a risk that stocks that have rallied strongly, particularly those driven by several popular investment themes earlier this year, could correct as we go into year's end," said a Shanghai-based fund manager.

The ChiNext Composite Index <.CHINEXTC> of mainly technology-related high growth start-up counters has surged nearly 70 percent in 2013 and currently trading at 52 times price-to-earnings, outshining the large cap-focused CSI300 <.CSI300>. The large-cap index is up 19 percent from its June low but is still down 5 percent so far this year and is trading at 14.5 times.

While high valuations of growth counters can be justified given Beijing's push away from investment-led growth, investors are growing cautious given the huge valuation difference, said another fund manager who participated in this month's poll.

Some respondents also said some good opportunities could emerge if initial public offerings in the A-share market resume at moderate valuations. Investors have suffered when IPOs were priced at excessively high valuations in the past, only to see share prices dive on listing debuts.

IPOs in the mainland have been suspended for nearly a year in a bid to reform the capital raising process with protecting investors' interests among its the regulator's aims.

On sector allocation, fund managers suggested higher exposure consumer-related stocks, while trimming exposure to the financial and automobile sectors.

(Editing by Kim Coghill)