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Thursday, April 14, 2011

China International Capital Corp. prediction - Global Banks Too Bullish on China's Stock Market as Pimco Buys

China International Capital Corp. prediction - Global Banks Too Bullish on China's Stock Market as Pimco Buys : China’s biggest investment bank is turning “cautious” on the country’s stocks, just as six of its overseas rivals and the manager of the largest mutual fund say it’s time to buy.

China International Capital Corp. predicts slowing economic and earnings growth will limit equity gains after the Hang Seng China Enterprises Index rose 6.2 percent this year, the best advance among major Asian indexes. The top-ranked provider of China research in Asiamoney’s survey recommends “defensive” companies including drugmakers and consumer staples producers.

“We’re turning cautious,” Hao Hong, the global equity strategist at CICC, said in an April 13 interview in Shanghai. “Economic growth is going to slow down in the coming months.”

CICC’s reduced outlook follows recommendations to boost Chinese stock holdings in the past month from Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Macquarie Group Ltd. and HSBC Holdings Plc (HSBA), along with forecasts for further gains of at least 14 percent by Credit Suisse Group AG (CSGN) and Deutsche Bank AG. (DBK) Pacific Investment Management Co., which oversees $1.2 trillion, said this week it has a “large overweight” position in China.

While the country’s shares have rallied for three straight weeks on speculation that the People’s Bank of China is near the end of its campaign to tighten monetary policy, Hong says bullish investors may be disappointed.
Rate Bets

The Hang Seng gauge of Chinese shares listed in Hong Kong, or H-shares, dropped 23 percent in the six months after the central bank stopped raising rates in 2007, underperforming the MSCI Emerging Markets Index by 14 percentage points. In 2004, the H-share gauge rose about 3 percent after rate increases ended, trailing the MSCI index by 8 percentage points.

The Hang Seng index slipped 0.6 percent to 13,481.73 yesterday, paring this year’s gain to 6.2 percent.

“Consensus sees the beginning of the end of the interest- rate hike cycle and thus is getting bullish,” Hong said in a report sent to clients April 10. “The end of the cycle is not necessarily bullish judging from the experiences of 2004 and 2007.”

Hong, a former analyst at Morgan Stanley and strategist at Citigroup Inc., predicted in January 2010 that stocks would retreat as the government reined in property speculation. The Hang Seng China gauge dropped 10 percent in the first half while the Shanghai Composite Index of so-called A-shares traded on the mainland declined 27 percent.

In November 2010, Hong advised investors to refrain from buying Chinese stocks after the biggest rally in 15 months. The Hang Seng China gauge declined for four straight months.
Inflation Jump

China has increased its benchmark lending rate by 1 percentage point to 6.31 percent since October and lifted banks’ reserve requirements three times this year to fight inflation and curb real-estate speculation.

Consumer prices jumped 4.9 percent in February from a year earlier, topping the government’s full-year target of 4 percent. Inflation probably accelerated to 5.2 percent in March, which would be the highest level since July 2008, according to the median estimate of 23 economists surveyed by Bloomberg. The government is scheduled to release the inflation figure today.

Policy makers will lift the key lending rate to 6.56 percent by year-end, according to the median forecast in a Bloomberg survey of 20 economists on March 22. Besides monetary tools, the government has deployed subsidies, state-food reserves and the threat of price controls to counter inflation, which Premier Wen Jiabao has described as a potential threat to social stability in the nation of 1.3 billion people.
‘Sustainable Rally’

Credit Suisse, Switzerland’s second-biggest bank, boosted its 12-month forecast for the Hang Seng index a day after the central bank’s rate increase on April 5. HSBC, Europe’s largest lender, increased its rating on China to “overweight,” while Macquarie, Australia’s biggest investment bank, said investors should lift holdings because the central bank is near the end of raising borrowing costs.

Chinese stocks were upgraded to “overweight” from “market weight” the previous week by analysts Helen Zhu and Timothy Moe at Goldman Sachs, the fifth-biggest U.S. bank by assets. They recommended banking and property shares and kept their 12-month target of 16,500 for the Hang Seng index. Jun Ma, a Hong Kong-based strategist at Deutsche Bank, Germany’s biggest lender, said in a report distributed March 21 that Chinese shares may climb about 25 percent.

Maria Gordon, an emerging-market stock fund manager in London at Pimco, said in an April 13 interview with Bloomberg Television that financial and property stocks are attractive. The $236 billion PIMCO Total Return Fund, managed by Bill Gross, is the biggest mutual fund in the industry’s history.

Cut Cyclicals

Frank Li, the China strategist at JPMorgan, said stocks may “seesaw” before a “sustainable rally” late in the third quarter, according to e-mailed comments yesterday. Goldman Sachs’s Moe, HSBC’s Garry Evans and Credit Suisse’s Peggy Chan didn’t respond to phone and e-mail requests for comment. Michael Kurtz, a strategist at Macquarie, declined to comment.

“Growth will be stronger than market expectations,” Deutsche Bank’s Ma said in a phone interview yesterday. “We’re expecting a small re-rating of the market as the macro fears recede.”

The MSCI China Index of mostly Hong Kong-listed China stocks “is cheap,” Ma said. The gauge trades for 12 times estimated earnings, compared with its historical average of 14.8, according to data compiled by Bloomberg. The Hang Seng gauge is valued at 11.1 times, compared with 11.6 for the MSCI Emerging Markets Index.

Slower Growth

The government will report today that first-quarter gross domestic product rose 9.4 percent from a year earlier, according to the median estimate of 25 economists surveyed by Bloomberg. That compares with 11.9 percent in the first three months of 2010.

CICC’s Hong advised investors to cut holdings of companies that rely on accelerating economic growth to boost earnings, including raw-materials producers. Profits at China-listed companies will rise about 19 percent in 2011, down from 40 percent last year, according to CICC estimates ( source www.bloomberg.com ) For the latest updates PRESS CTR + D or visit Stock Market news Today

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