Analysis: China Equities to Be Bullish for 2nd Quarter

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Last updated at: (Beijing Time) Monday, June 17, 2002

Analysis: China Equities to Be Bullish for 2nd Quarter

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China equities are expected to outperform the Asian regional markets in the second half this year, driven by mid and large caps in the telecom, energy, utilities, consumer and airline sectors, experts in Hong Kong believed Monday.

In a report entitled "China strategy in the second half this year: return of the heavies," Kenneth Luh, Credit Suisse First Boston's Head of China Research, forecast that year-end targets are at 19.0 for MSCI China and 2,500 for the Hang Seng China Enterprises Index, representing approximately 12 percent and 17 percent potential upside, respectively.

CSFB's analysts attributed the coming surge in equity market to China's improving macro trends, a weakening U.S. dollar, favorable liquidity flow, improving industry fundamentals and restructuring developments.

"The outlook for China's equity markets is extremely positive at the moment, characterized by accelerating economic growth, improving corporate earnings and increasing market liquidity," said Yiping Huang, senior analyst for Asia Pacific of Salomon Smith Barney.

Huang seems quite agreed with CSFB's prediction, noting that faster economic growth and the weakening of the U.S. dollars could generate some pressure for appreciation on the China Yuan Renminbi, if the band is indeed widened as expected.

The interest rate is likely to stay unchanged in the short term, and China's sovereign bonds are still quite expensive compared with other emerging market products, Huang argued.

CSFB, a leading global investment bank which was ranked the 2nd for global research in many benchmark polls, expected eight percent GDP growth in China in 2002 on the back of resilient domestic consumption, heavy foreign direct investment flows and a pick up in fixed asset investment.

"More importantly, quality of growth is improving, as private demand has replaced government stimulus as the main driver of the Chinese economy. Among all regional economies, China is also the least dependent on exports, thereby reducing its exposure to the uncertainty of the U.S. final demand recovery," Luh said.

Most analysts here also believed that the weakening trend of the U.S. dollar could be positive to China's foreign direct investment inflow and export growth, given the Renminbi's defacto link to the U.S. dollars.

The CSFB's analyst noted that liquidity is accumulating in favor of China equities due partly to China's robust macro outlook and partly to global fund flow towards defensives and sustainable domestic growth, as the U.S. recovery loses momentum and the technological sector fundamentals seem set to weaken.

Luh said that the Chinese telecom and energy sectors, the two largest sectors by market capitalization, will offer the most meaningful upside on a combined price gains and size basis. The energy sector will likely lead the performance of China equities because of rising oil prices.

The mobile sector could benefit as the recent operating data have revealed a stabilizing average revenue per user (ARPU) trend and among mid-caps, continuing merger and acquisition and restructuring could serve as catalysts for independent power producers and airlines, Luh said.

Indeed, Huang said production and trade data provide further evidence of an acceleration in China's growth. This trend is likely to continue as global demand picks up further and private sector investment and consumer spending rebound.

Growth of industrial production climbed to 12.9 percent in May from 12.3 percent in April, continuing the acceleration process of the past months, and production growth is still driven by exports, foreign direct investment and state sector investment, Huang explained.

China's export growth rose from 17.2 percent in April to 18.4 percent in May, while import growth from 17.8 percent to 19.3 percent, and the trade surplus stood at a healthy 2.1 billion U.S. dollars.

According to Huang, China's corporate earnings have already started to improve, even in the state sector, and the government recently raised its monetary growth target, which is favorable for corporate earnings and for stock prices.

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