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Morgan Stanley sees 'boom and bust' for China stocks

(China Daily/Agencies)
Updated: 2009-12-17 08:02

China stocks are headed for a "boom and bust" in 2010 because a rally in the first half may stall as inflation accelerates and the government withdraws some stimulus, Morgan Stanley said.

"We see a temporary window of high growth and low inflation in the first half of 2010 followed by rising inflation worries in the second half," Morgan Stanley analysts led by Jerry Lou wrote in a report. "This means an equity market boom and bust in the same year."

The MSCI China index may rise to 81.7 next year, higher than an earlier forecast of 74.1, the analysts said. They cut their forecast for the Hang Seng China Enterprises Index by 5.3 percent to 15399 to reflect the valuation of bank shares and raised their estimate for Hang Seng Index by 11 percent to 25716.

Morgan Stanley's forecasts translate into gains of as much as 25 percent for mainland shares and an 18 percent gain in Hong Kong equities from Tuesday's close.

The MSCI China, tracking mostly mainland companies traded in Hong Kong, fell 1 percent to 65.11 yesterday, while the Hang Seng Index declined 0.9 percent to 21611.74. The gauges have both climbed more than 50 percent this year.

Analyst expectations of strong growth in China appear to be "unanimous", with earnings-per-share for the MSCI China forecast to grow 21 percent, the Morgan Stanley analysts said. This means that the cost of capital and the strength of the US dollar will be a bigger factor for Chinese equities next year.

China's government will probably adopt a "moderate" exit to its monetary and fiscal policies in order to ensure that infrastructure projects will be completed, the report said. High domestic grain prices relative to international markets will provide an "inflation buffer", Morgan Stanley said.

Still, a strong recovery in developed economies and potential inflation "shocks" could send mainland and Hong Kong shares lower more than 20 percent from Tuesday's level, Morgan Stanley said. The brokerage's so-called bear-case scenario forecasts a drop to 50.4 for the MSCI China and a decline to 17161 for the Hang Seng Index.

"Growth generally leads inflation by six months in the US, which means a growth shock in the US might lead the inflation shock this time - if there is one in 2010," the analysts said. "If the US property market rebounds surprisingly, we would sell China equities because inflation could shock and the dollar strengthen."

Investors should own consumer, insurance, Internet and media, phone and energy shares in China next year and hold fewer banks, developers and materials suppliers because of the risk of a policy exit, the brokerage said.

China stocks will probably be in a "slowly rising bull market" next year, Royal Bank of Scotland Group Plc analyst Wendy Liu said yesterday in a Bloomberg Television interview in Hong Kong. Still, so-called asset plays including banks and property may need to "calm down a bit" after this year's rally, she added.