Despite the global economic ugliness of the last few weeks, the China stocks rally is on, according to an analyst at a large Chinese-owned brokerage. In fact Peter So, head of research at CCB International, told Equities recent economic woes in some ways add fuel to the rise.
The second-half of 2011 China stocks rally has long been an article of faith for numerous analysts in Hong Kong. A drop in Chinese inflation would allow authorities to ease tight monetary policies and investors would rush to take advantage of low valuations, the thinking went.
But that was before the disheartening political wrangling in the U.S. over saving the country from default, increased worry over European debt and global economic weakness. In late July and early August these problems dragged the Hong Kong market sharply lower along with other global exchanges in extreme volatility.
Although the downturn hurt China stocks in the short run, So said, it did not derail the second half rally. Current lower prices for China stocks and prospects for slower growth in the U.S. and Europe may encourage investors to look to China along with other Asian stocks.
“Globally many stocks are very attractive – if the economic recovery continues,” So said. “That is the case for Asia, but not necessarily for developed nations.”
The U.S. Federal Reserve Board basically conceded that U.S. growth would be meager for an extended period by guaranteeing low interest rates into 2013. So maintains that investors will shift from low growth and interest rates in the U.S. to higher growth Asian markets.
The global economic decline may also help China stocks, according to So, because it makes it less likely China will raise interest rates or banks’ reserve requirements in its fight against inflation.
Another key to stronger China stocks is the high growth in profits that is being revealed as interim results are released in Hong Kong. Banks in particular look healthy, which reduces earlier concern about bad loans. “This justifies a strong rebound,” So stated.
Release of good earnings results has already started the rally, he said, and it should last for a few weeks. After a rise in stocks prices the market might consolidate until near the end of the year when investors focus on prospects for good 2012 earnings.
Banks, cement producers and machinery companies will help lead the way, So said. (CCB International is an arm of the major Chinese bank CCB.) He likes bank ICBC and cement maker Anhui Conch. His goal for the blue-chip Hang Seng Index for the end of 2011: 26,000, a 29% rise over Tuesday’s close. End
DAILY FIX -- Profit-taking Shaves Gains; Telecoms Advance
Hong Kong Blue Chips: -48, -0.2%, to 20,212, 08-16-11, Hang Seng Index
Chinese Stocks in Hong Kong: +2, +0.02% to 10,947, 08-16-11, HSCE Index
Shanghai Stocks: -0.7%, 2,608, 08-16-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: +10.2 to 405.9, 08-15-2011, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong blue chips opened 85 points higher following gains on Wall Street, but lost ground in profit-taking. Telecoms soared in the wake of Google's purchase of Motorola Mobility: Foxconn (2038) +12.1%. KGI Research
Quotable: "We expect the stock market to see a technical rebound this week led by Chinese banks and telecom stocks." Guoco Capital. 8-15-2011
Chinese Company to Watch: Man Wah Holdings (1999) reclining sofa maker. "We think Man Wah’s valuation discount to its peers is unjustified given its leading position in the fast-growing Chinese market as well as good value-formoney positioning in the overseas market." Guoco Capital. 8-15-2011
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For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN
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