History Offers Hope for China Stocks

Gene Linn  |

History and a drop in political and economic uncertainty will likely usher in a solid rally in China stocks in the next several years, according to a Deutsche Bank Research paper. The four-year itch, and explosive bull markets offers hope for good gains, countering concerns raised in yesterday’s column about weakness in China’s credit system.

Discussing global markets in general, the paper states: “The history of banking crises suggests strongly that four years after equity market lows produced by such crises, new powerful equity bull markets explode, and on average, equity markets double in this four-year period.” Deutsche Bank offers a number of possible reasons for a powerful rally: stabilizing property markets, well-advanced de-leveraging and healing of the economy, restructured firms, high equity risk premium and improving confidence.

Adding to the cheery outlook, according to the bank, is “a step-reduction in global policy uncertainty.” Central banks in the U.S., Europe and Japan made it clear they would pursue and easy money policy “until the far horizon.” Elections in the U.S. and Japan and transition to a new leadership in China reduce fiscal and regulatory uncertainties.

“While nerves in the financial industry are frayed, these are robust contrary indicators,” the research piece says.

“Our strongest advice is to have an exceptionally positive long-term view on equities.”

However, Deutsche Bank cautions that current euphoric sentiment in U.S. and global markets may lead to some short-term losses. “Some near-term
caution is warranted. We have cut the portfolio beta a tad.”

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In Asia, the bank likes Thailand, partly because leading economic indicators are strong. The research article also says, “HK/China are looking better.”

The bank is adding China Railway Construction Corp. Ltd. (CWYCY), New China Life Insurance Co. Ltd. (LFC) to its portfolio.

So, is the outlook for China stocks bright overall as Deutsche Bank Research suggests, or clouded by credit woes as posited in yesterday’s column. The answer, I think, is that as always this is a dauntingly complex market, and risks are a bit higher now. End


Hong Kong Blue Chips: +31, +0.1%, to 23,445, 2-15-13, Hang Seng Index

Chinese Stocks in Hong Kong: +24, +0.2%, to 11,845, 2-15-13, HSCE Index

Shanghai Stocks: +14, +0.6%, to 2,432, 2-8-13, Shanghai Composite Index. Closed for holiday

Chinese Stocks in the U.S.: -0.7, 389., 2-14-13, Bank of New York Mellon, ADR Index-China

Insight: Hong Kong traded quietly in a narrow range as investors waited for Mainland markets to reopen Monday following the Lunar New Year holiday. KGI Research

Quotable: "HSI faces resistance at 23,685. We maintain our view that HSI will be range bounded in near term with support at 23,000 and resistance at 23,685, which was its down-gap in early February." Core Pacific Yamaichi. 2-15-13

Chinese Company to Watch: "After a strong earnings recovery in 2012, we expect China’s power sector to see continued earnings growth with greatly improved earnings visibility this year.... Maintain OVERWEIGHT with Huadian Power (HPIFY) and China Power International (CPWIY) as our top picks." UOB Kay Hian. 2-14-13

Brokerages and analysts cited here have disclaimers on their websites emphasizing their statements are for information only. They do not endorse my blog, and I don’t endorse them.

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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