China’s stocks may slump for a second year as the central bank raises interest rates to tame inflation, according to Zhang Kun, the strategist at Guotai Junan Securities Co. who correctly predicted last year’s drop.
According to Zhang, whose Shanghai- based firm Guotai Junan is the nation’s second-largest brokerage by revenue, said. “Inflation is the biggest risk. The government will keep tightening.”
Guotai Junan is alone among China’s major brokerages in predicting declines for 2011. China International Capital Corp., the only other major Chinese brokerage to correctly forecast the index’s drop in 2010, also expects an advance this year.
The Shanghai Composite fell 14 percent in 2010 to 2808.08, making it the worst performer among benchmark indexes in the world’s 10 biggest markets. Premier Wen Jiabao’s government ordered banks to set aside more reserves six times and boosted rates twice since October to tame inflation and curb asset bubbles after record gains in lending and property prices.
The central bank will keep increasing borrowing costs to cap inflation at around 4 percent this year after it reached a 28-month high of 5.1 percent in November, Zhang said. Last March, he said the Shanghai gauge, which had already dropped 9.2 percent, would fall a further 17 percent to 2,500 in the first half as the government boosted measures to cool economic growth. The index slid 27 percent in the first six months of 2010.
Hao Hong, global equity strategist at CICC, the top-ranked brokerage for China research in Asiamoney magazine’s annual survey, expects the Shanghai gauge to rebound as the economy grows more than 8 percent and inflation eases.
Last January, Hong predicted stocks would fall in the first six months as the government reined in property speculation. The Shanghai Composite dropped in the first half before rebounding 25 percent between July 1 and the end of October.
“We are confident that the Chinese government has the capability to control inflation at a reasonable level in 2011,” investor Mark Mobius, who oversees about $40 billion as executive chairman of Templeton Emerging Markets Group, said in an e-mailed on Dec. 29. “If China can keep the CPI at about 4 percent in 2011, the equity market should perform well.”
Shenyin & Wanguo said the Shanghai Composite will reach 3,800 in 2011 as policy tightening eases. The brokerage cut its 2010 target to 3,000 during its mid-year investment conference in June 2010 from the original forecast of 4,200. Non-Chinese brokerages forecasts for the MSCI China Index which closed at 66.6 at the end of 2010 are shown below.
Inflation seems the main concern and is not going to be easily tackled. Government have pledged to soak up excessive money supply that fueled a record gain in property prices and drove up food costs, which account for a third of the weighting of inflation. In the so-called Central Economic Work Conference, attended last month by President Hu Jintao and Premier Wen, the leaders announced a shift in monetary policies to “prudent” from “appropriately loose”.
“After the Chinese New Year period, we might begin to see more stability in food inflation,” JPMorgan’s Ulrich said in a Dec. 21 interview. The Hong Kong-based strategist likes consumer and construction-related stocks as they will benefit from government efforts to boost domestic consumption and public housing.
China is lagging behind counterparts across Asia that took steps earlier to raise borrowing costs from global recession lows. India has lifted its benchmark rate six times since March 2010, while Malaysia increased it three times, also starting in March. Taiwan began increasing rates in June and South Korea in July. Most analysts are expecting the government to boost rates twice more and cut the quota for new bank loans from 2010’s 7.5 trillion yuan.
The mid-year rebound for the Shanghai Composite faltered in November after the central bank raised rates on Oct. 19 for the first time in three years. A measure of property developers was the worst performer in the index in the last quarter of 2010. A gauge of banks and real-estate companies plunged 27 percent last year, the most among the 10 industry groups in the CSI 300 Index, comprising stocks in the Shanghai and Shenzhen stock exchanges.
The property market has been extremely hard to predict and effects widespread. There are so many conflicting opinions among top fund managers and investors on this issue
The Shanghai gauge’s decline has driven down valuations for the 913 companies to an average of 18.3 times reported earnings, compared with the historical average of 30.5 times, according to data compiled by Bloomberg. This means current valuations in China, despite having risen from the lows of early 2009, still remain attractive historically.
Last year’s drop for China’s benchmark gauge was the biggest since 2008, when the global financial crisis curbed the nation’s exports. The index jumped 80 percent in 2009 as a 4 trillion-yuan ($605 billion) stimulus package and record new lending helped the economy recover from the slump in growth.
China’s stocks entered a so-called bear market in May after the government introduced tightening measures to curb real- estate speculation. Equities reversed course and entered a bull market in October as the Shanghai Composite rebounded 20 percent from the 2010 low in July on an improving economic growth outlook and faster yuan appreciation.
I think we’ll probably continue to see a volatile stock market as long as inflation persists. Bear in mind that all except 2 brokerages had estimated the China stocks would soar in 2010.
|Major Brokerages’ Forecasts for Chinese Stocks in 2011 – Brokerage Index Target|
|Citic Securities||Shanghai Composite||3,500|
|Shenyin & Wanguo||Shanghai Composite||3,800|
|Haitong Securities||Shanghai Composite||3,500|
|Sinolink Securities||Shanghai Composite||4,200|
|Galaxy Securities||Shanghai Composite||4,000|
|Guotai Junan||Shanghai Composite||No Gain|
|JPMorgan||Shanghai Composite||20% Gain|
|Citigroup||Shanghai A-Share Index||4,000|
|Credit Suisse||MSCI China Index||81|
|Morgan Stanley||MSCI China Index||94.5|
|UBS||MSCI China Index||88|
|Deutsche Bank||MSCI China Index||15% Gain|
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