Markets

Slump, slowdown concerns 'overdone'

By Shiyin Chen (China Daily/Agencies)
Updated: 2010-05-26 09:50

SINGAPORE: China stocks are factoring in both accelerating inflation and declining growth, a "mispricing" that is poised to "correct soon", Morgan Stanley said.

The brokerage upgraded steel and building materials shares in its China portfolio to "overweight" from "underweight", a week after increasing the weighting of banks, analysts led by Jerry Lou wrote in a report.

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They maintained their end-2010 estimates of 81.7 for the MSCI China Index and 15399 for the Hang Seng China Enterprises Index, representing gains of 40 percent and 37 percent, respectively, from Monday's close.

Chinese stocks have tumbled this year as the People's Bank of China raised bank reserve requirements three times and policymakers introduced curbs on the property market to cool lending and curb speculation.

The MSCI China has lost 13 percent in 2010, while the Hang Seng China Enterprises has dropped 15 percent so far this year. The Shanghai Composite Index is the only major Asian gauge that has retreated further, down 19 percent for the year.

"Growth will remain intact and inflation will peak in" the second half of 2010, the analysts wrote. "The market is likely to re-rate from the current cheap valuations."

Valuations for the MSCI China Index have slumped to 14.6 times reported earnings from last year's high of 22.6 times on Dec 4, according to data compiled by Bloomberg.

The Hang Seng China Enterprises has a multiple of 13.4 times, compared with 21.5 times on Dec 4.

The Hang Seng China Enterprises fell 4.57 percent to 10729 in Hong Kong on Tuesday. The gauge entered a so-called bear market after having retreated 21 percent from last year's high.

The MSCI China also dropped 2.9 percent.

China National Building Material Co, China Shanshui Cement Group Ltd, Maanshan Iron & Steel Co and Angang Steel Co were added to Morgan Stanley's China model portfolio, according to the report. They reduced holdings in consumer, automobile and media shares.

The analysts on May 17 added Bank of China Ltd, Bank of Communications Co and China Construction Bank Corp to the model portfolio, saying that the government may hold off on further tightening policies amid "uncertainties" in the global economic outlook.

An "unofficial pause" in the government's tightening efforts will be one of three possible catalysts for stocks gaining in the second half, Morgan Stanley wrote in Monday's report.

Global uncertainties

Shares rose on Monday after Xu Lianzhong, an official with the National Development and Reform Commission's price monitoring center, said China should be cautious in introducing new tightening measures as the global economic environment is complex.

The European debt problem is one of many global economic uncertainties that China faces, Xu wrote in the China Securities Journal.

China will move gradually and independently in making changes to the nation's exchange-rate mechanism, President Hu Jintao also said at the opening of talks with the United States in Beijing on Monday.

China's central bank will remain "particularly cautious" about raising interest rates because of debt incurred by local governments and the potential for bad loans at the nation's banks, said Liu Yuhui, an economist with the Institute of Finance and Banking under the Chinese Academy of Social Sciences.