Sometimes an interest rate increase is a good thing for the stock market. That is the case after China raised rates for the third time this year on Wednesday, according to CCB International head of research, Peter So.
Since increases in interest rates generally slow economic growth, they usually drive stocks lower. Certainly China intends for its series of rises to restrain its economy to tame stubborn inflation. But So asserts that the increase in rates will actually drive China stocks higher.
“The stock market already expected an interest rate hike,” So said. “It takes it for granted that was the last one and acted quite positively.”
On Thursday, Hong Kong blue chips rose as much as 190 points in early trading before losing most of their gains. The index of Chinese companies rose 0.3%.
Other analysts have also remarked that Wednesday’s increase may have been the last one because Chinese inflation probably peaked in June. So told Equities he expects inflation topped out in June at 6.2% (the figure will be released next week).
With a drop in inflation and an easing of economic tightening on the horizon, So said, stocks in Hong Kong will most likely rise sharply from July through early September. Then he expects some consolidation before stocks rise again late this year as they anticipate 2012 corporate results. By the end of the year the blue-chip Hang Seng Index will hit about 26,500 and the index of Chinese companies should reach about 15,000, he said.
The main gainers initially, according to So, will be basic material producers and consumption plays. CCB International likes polymer and refrigerant maker Dongyue (189 in Hong Kong) and consumer electronics stock Gome (493).
Later in the year Chinese banks will rise, So said. (CCB International is an arm of the giant China Construction Bank.) He favors ICBC partly because its 2011 P/E ratio is a low 8X, and the projected ratio 2012 is 7X. And unlike some other big Chinese banks, it does not have an overhang of overseas strategic investment that might be sold off. The time limit for its partners to make such sales has expired. End
DAILY FIX — Losing Early Gains; Cement Producers Rise
Hong Kong Blue Chips: +13, +0.06%, to 22,530, 07-07-11, Hang Seng Index
Chinese Stocks in Hong Kong: +42, +0.3% to 12,640, 07-07-11, HSCE Index
Shanghai Stocks: -0.6%, 2,794, 07-07-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -2.5 to 442.5, 07-06-11, Bank of New York Mellon, ADR Index-China
Insight: Hong Kong blue chips rose as much as 190 points in early trading, but lost most of the gains in weak turnover. Chinese cement producers gained: TCC (1136) +6.3%. KGI Research
Quotable: “Concerns over repayment of local government debt will continue to be a major overhang on the banking sector in 2H11…. Given a higher percentage of local fiscal income will be used to repay local debt in 2011 and 2012, local infrastructure and FAI investments are likely to further slow down in 2012.” CCB International. 7-5-2011
Chinese Company to Watch: “…(L)onger term investors can take advantage of dips to accumulate the large state banks such as BOC, ICBC and CCB that are only trading at 1.1-1.8x end-FY11 P/B.” Haitong Securities. 7-6-2011
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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