“There will be no gains again,” Zhang, whose Shanghai- based firm Guotai Junan is the nation’s second-largest brokerage by revenue, said in an interview. “Inflation is the biggest risk. The government will keep tightening.”
Guotai Junan is alone among China’s major brokerages in predicting declines for 2011. Citic Securities Co., China’s biggest listed brokerage, and Shenyin & Wanguo Securities Co., voted the nation’s most influential research unit by New Fortune magazine, forecast gains of at least 25 percent in the benchmark Shanghai Composite Index. 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, according to data compiled by Bloomberg. 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 index dropped for the first time in five days today, losing 0.5 percent to 2,838.59.
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.
‘Trend Up’
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.
“China’s stocks will trend up in 2011, but it will be volatile,” said Hong, who is based in Beijing. “A continuing global recovery and sustained Chinese growth should support the market.” Hong said he favors commodity producers, agriculture and health-care companies. Both Hong and Zhang declined to give a yearend target for the Shanghai Composite in 2011.
Investor Mark Mobius and Jing Ulrich, chairwoman of China equities and commodities at JPMorgan Chase & Co., say China’s stocks are set to rebound because the government will keep inflation under control.
‘Perform Well’
China’s purchasing managers’ index fell to 53.9 last month from 55.2 in November, the nation’s logistics federation and the statistics bureau said Jan. 1.
CICC estimates consumer prices rose 4.5 percent in December from a year earlier, while Bank of America Corp. forecast 4.8 percent. The inflation rate jumped 5.1 percent in November on surging food prices after a 4.4 percent gain in the previous month. The government’s annual CPI target is 3 percent.
“We are confident that the Chinese government has the capability to control inflation at a reasonable level in 2011,” Mobius, who oversees about $40 billion as executive chairman of Templeton Emerging Markets Group, said in an e-mailed response to questions on Dec. 29. “If China can keep the CPI at about 4 percent in 2011, the equity market should perform well.”
Rate Laggard
Government leaders 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” this year.
“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, referring to the lunar new year that ends by mid-February. 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, while Malaysia increased it three times, also starting in March. Taiwan began increasing rates in June and South Korea in July.
“Inflation isn’t an issue that’s going to be easily tackled,” said Larry Wan, Beijing-based head of investment at Union Life Asset Management Co., which oversees the equivalent of $2.21 billion.
Stock Bulls
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.
“We’ll see tighter monetary policies with new loan growth to be cut more than the market anticipates,” Guotai Junan’s Zhang said, predicting the government will boost rates twice more and cut the quota for new bank loans from 2010’s 7.5 trillion yuan. “Liquidity will be a problem for the market.”
Citic, Shenyin & Wanguo, Haitong Securities Co. and Galaxy Securities Co. are all forecasting gains of more than 20 percent for the Shanghai Composite. Sinolink Securities Co., based in the western city of Chengdu, is the most bullish with a prediction that the index will rise to 4,200 this year, or a 50 percent advance from the 2010 close.
Property Outlook
Among non-Chinese brokerages, JPMorgan is targeting a 20 percent gain, while Citigroup Inc. predicts Shanghai’s A-share index could climb to as high as 4,000. Forecasts for the MSCI China Index range from 81 at Credit Suisse Group AG and 88 at UBS AG to 94.5 at Morgan Stanley, the most bullish prediction 42 percent above the 66.6 close at the end of 2010.
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.
Jim Chanos, the hedge fund manager who was one of the first investors to foresee the 2001 collapse of Enron Corp., said in a Bloomberg Television interview Dec. 17 that China’s property boom continues “unabated” and has even picked up since the government enacted policies to cool speculation. Home prices in 70 Chinese cities climbed 7.7 percent in November from a year earlier, according to the statistics bureau, even after the government suspended mortgages for third-home purchases and pledged to introduce a property tax.
Cheaper Stocks
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.
“Current valuations in China, despite having risen from the lows of early 2009, still remain attractive to us,” said Mobius, who likes commodity and consumer companies in emerging markets including China. “Over the longer term, markets should reflect the underlying strong economic growth in the country and the region.”
China’s economy grew 10.1 percent last year, according to the median estimate of 18 economists in a Bloomberg survey. The expansion will slow to 9 percent this year, three times the rate of the U.S., Bloomberg surveys show.
Citic predicts the Shanghai Composite may rebound to 3,500 by the end of this year, bolstered by earnings that are growing at a rate of 22 percent. The brokerage had estimated the gauge would soar to 4,500 in 2010.
Continued Volatility
Shenyin & Wanguo said the index will jump to 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 from the original forecast of 4,200.
“The index target is subject to revision in the course of the year with the changes of policies and other factors,” said Fang Bo, a Shanghai-based press official at Shenyin & Wanguo.
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.
“We’ll probably continue to see a volatile stock market as long as inflation persists,” said Union Life’s Wan.
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 CLSA MSCI China Index 25% Gain Deutsche Bank MSCI China Index 15% Gain -------------------------------------------------- For the latest updates PRESS CTR + D or visit Stock Market news Today
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