Renminbi appreciation momentum to slow down
Updated: 2008-10-10 06:59
By Daniel Chui(HK Edition)
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Against the backdrop of a global slowdown, the contribution of exports to real GDP growth in China dropped from 3 percent in 2007 to less than 1 percent in the first half of this year. We expect that number will fall further in the second half.
We expect Beijing will continue to slow the pace of renminbi appreciation in order to help lessen the pain of the export sector, which is estimated to account for around 10 percent of China's total employment.
Among the positives:
The earnings per share (EPS) estimate for MSCI (Morgan Stanley Capital International) China index in 2008 has fallen from 26 to 19 percent. Our sense is that the market has already discounted most of the earnings downgrades for the second half.
Even after the recent downgrades, China, in terms of EPS forecasts, still ranks among the highest in Asia.
The MSCI China index is trading at a forward price-to-earning (PE) ratio of 10 times, which is close to the trough level over the past 15 years.
Macro indicators in China remain solid, despite slowing. Valuations are attractive relative to underlying growth in our view.
In truth, out of all the major markets in Asia, we believe that China offers investors the best risk/reward trade-off. Any rally in Asian markets will likely be led by China, especially since it is the country in which inflation was the first to peak, and is the country with one of the strongest fiscal positions.
That said, there could be an overhang on the turmoil of the global financial system, as well as relatively weak domestic confidence, reflected in the poor performance of A-share markets. A-Shares have experienced huge volatility and sell-offs: The A-Share markets have fallen 60 percent off their peaks while the A-H Share premium (for dual-listings) has retreated significantly from 100 percent earlier this year to currently 20 percent. Financials (A-Shares), which comprise 50 percent of the A50 and nearly 35 percent of the CSI 300, are trading at a 5 to 20 percent discount to the H-Shares listed in Hong Kong.
Market sentiment has clearly fallen into the pessimistic domain, and we believe that the share prices of most quality Chinese companies have become fundamentally oversold.
While an easing in the oil price should alleviate inflation risks, it is coming as a result of disappointing growth numbers globally, and as a result is providing less relief than one would have hoped. In particular, earnings forecasts for exporters and/or global cyclicals facing troubled regions such as developed Europe will continue to face downside pressure.
On the positive side, the Chinese economy appears to be headed for a soft landing, and given the weak equity market sentiment, we are finding pockets of value across various sectors.
The global backdrop is weak, but investors are almost uniformly bearish, which could prove a good buying opportunity for long-term winners. We maintain our preference of industry leaders/consolidators and the major players with strong pricing power in respective markets and/or industries.
The author is head of investor communications at JF Asset Management.
(HK Edition 10/10/2008 page3)