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Stock rally likely to fade this year, says Deutsche Bank

(China Daily/Agencies)
Updated: 2010-01-07 08:02

A rally by China's stocks may fade from the second quarter as inflation triggers "significant policy tightening" by the government and the US economy weakens, Deutsche Bank AG said.

The MSCI China Index may still end the year 15 percent higher, Ma Jun, Deutsche Bank's Hong Kong-based China economist, said in a note to clients. The index tracking mostly mainland companies traded in Hong Kong jumped 59 percent last year after losing 52 percent in 2008.

"We see upside potential to the indices in the first few months, as the macro environment should remain favorable," Ma said. "CPI and asset inflation will likely pose major macro challenges and the resulting policy responses will cause market risks," he wrote, referring to the consumer price index.

Deutsche Bank joins Morgan Stanley in predicting an end to China's rally in 2010 as inflation accelerates and the government withdraws some stimulus. Morgan Stanley analysts led by Jerry Lou said on Dec 15 they expect a "boom and bust" by the nation's equities this year as gains in the first half stall.

A record 9.2 trillion yuan ($1.3 trillion) of loans in the first 11 months of this year has added to the risk of asset bubbles and resurgent inflation. The nation's consumer prices climbed 0.6 percent in November from a year earlier, snapping a nine-month run of deflation.

'Bubble' concern

Accelerating inflation may inflate a "full-blown" bubble in China's stock and property markets this year, BofA Merrill Lynch Research's China strategist David Cui said on Dec 28. Investors may divert savings into equities and housing as the pace of inflation outstrips interest on bank accounts, Cui said.

Premier Wen Jiabao pledged on Dec 27 to tackle "excessive" property-price gains in some cities after prices across 70 cities rose at the fastest pace in 16 months in November.

The government said yesterday it would restrict credit for purchases of second homes to curb speculative housing investments, as well as crack down on property hoarding by developers.

Deutsche Bank's Ma said deceleration of year-on-year growth and a second dip in the US will also "negatively affect" Chinese stocks from the second quarter.

Nobel Prize-winning economist Paul Krugman said this week he sees about a one-third chance the US economy will slide into a recession during the second half of the year as fiscal and monetary stimulus fade.

Ma recommended investors buy insurers, as well as consumer and agriculture companies on rising prices, and avoid refining and power companies.

His top stock picks include Ping An Insurance (Group) Co, China's second-biggest insurer, New World Department Store China, which operates upscale department stores in China, and Texwinca Holdings Ltd, a producer of knitted fabric.

Deutsche Bank expects China's economic growth to accelerate to 9 percent in 2010 from 8.4 percent last year, Ma said.?