The Shanghai Composite Index (SHCOMP) will gain 36 percent because slowing inflation will let policy makers cut interest rates and bank reserves, according to Zhang Han, a strategist at Guotai Junan Securities Co., the only major brokerage to foresee the slump. China International Capital Corp., led by the son of a former premier, forecasts a “slight” drop since the economy isn’t slowing enough to permit “aggressive” reductions in borrowing costs, said Hao Hong, CICC’s global equity strategist.
While China avoided the global recession in 2009 and is growing more than twice as fast as the world economy, the index has been the worst among the 10 biggest markets in the past two years, according to data compiled by Bloomberg. The central bank boosted rates and reserve requirements to curb property prices and inflation that reached a three-year high in July. Premier Wen Jiabao said on Jan. 3 that business conditions may be “relatively difficult” this quarter and monetary policy will be adjusted.
“Liquidity will improve as a result of the government’s easing policies,” Zhang said in a telephone interview from Shanghai on Dec. 21. “That’ll help stocks to rebound in the first quarter.”
Earnings Growth
Zhang forecasts the Shanghai Composite, which tracks mostly yuan-denominated A shares, will rise to 3,000 this year from 2,199.42 at the end of 2011. Overseas fund managers need to be approved as qualified institutional investors to buy A shares.
Corporate earnings may rise 10 percent this year, Zhang said. Profit growth in the MSCI BRIC Index (MXBRIC) of the four largest emerging markets will slow to 5 percent from 19 percent last year, according to more than 12,000 analyst estimates compiled by Bloomberg as of Dec. 28.
The Shanghai Composite fell 1.6 in the first week of trading in 2012, compared to gains of more than 2 percent for gauges in Brazil, Russia and India, the other BRIC nations.
HIT Shouchuang Technology Co., a department-store owner based in Ningbo city, was the Chinese index’s best-performing (SHCOMP) stock last week with a 12 percent gain. Markor International Furniture Co., a furniture maker located in the western city of Urumqi, tumbled 21 percent for the worst performance.
The largest advance in the Shanghai Composite last year was a 195 percent surge by Shanghai-based China Fortune Land Development Co. Irico Display Devices Co., a manufacturer of television picture tubes based in Shaanxi province, sank 66 percent, the biggest decline of 2011.
Record Low
The Shanghai gauge traded at a record low (SHCOMP) 8.7 times estimated profit on Jan. 5, compared with a ratio of 9.2 for Brazil’s Bovespa Index, 5.4 for Russia’s Micex Index and 13.8 for India’s BSE India Sensitive Index, according to data compiled by Bloomberg.
Goldman Sachs Group Inc., which coined the term BRIC a decade ago, said in a Dec. 7 report that economic growth for the largest emerging nations may have peaked because of a smaller supply of new workers.
Chinese stocks will “struggle” this year as national economic growth (CNGDPYOY) exceeding 9 percent and inflation at 4 percent won’t warrant an “aggressive” easing, CICC’s Hong wrote in a Dec. 16 e-mail. Equities may plunge in the first half before recouping losses later in the year, the strategist said, without giving an index target because of company policy.
Slowdown, Volatility
“The theme is slowdown and volatility,” said Hong, who favors utility, energy, telecommunications and consumer-staple companies. “It would be hasty to make a move now.”
Beijing-based China Shenhua Energy Co. (601088), the nation’s biggest coal producer, trades for 9.4 times estimated profit, data compiled by Bloomberg show. Shanghai-based China United Network Communications Ltd. (600050), the best-performing telecommunications stock in the CSI 300 Index last year, is valued at 18.9 times.
Hong isn’t in the majority in the brokerage industry. Twelve of 13 firms surveyed by Bloomberg forecast Chinese stocks will rise this year. The nation’s equities haven’t posted three straight years of declines since the Shanghai Stock Exchange opened in 1990.
China will boost domestic consumption to offset an export slowdown and allow for faster gains in the yuan to tame inflation, Mark Mobius, who helps oversee about $40 billion as executive chairman of Templeton Emerging Markets Group, said in an e-mail on Dec. 14.
Fastest Growth
“The Chinese leadership has the organizational skills and policies capable of ensuring that China continues to achieve the highest gross domestic product growth of any major country in the world,” Mobius said. He favors consumer stocks (SHCOMP) because they will benefit most from rising Chinese incomes.
Kweichow Moutai Co. (600519), the country’s largest maker of baijiu liquor, is valued at 17.9 times profit. Net income for the company, based in Guizhou province, is expected to rise 37 percent in 2012, according to analyst estimates compiled by Bloomberg.
China’s economy has expanded at an average pace of 10.3 percent annually over the last decade, data compiled by Bloomberg show. Growth slowed to 9.1 percent in the three months ended Sept. 30 from 9.5 percent in the previous quarter as shipments to Europe, China’s biggest export market, slumped. While manufacturing contracted in November for the first time since February 2009, it expanded last month, according to China Federation of Logistics and Purchasing data.
Slowing Inflation
UBS AG cut its prediction on Nov. 29 for growth in 2012 to 8 percent from 8.3 percent, while Citigroup Inc. reduced its forecast to 8.4 percent from 8.7 percent. Average economic growth in the BRIC nations will slow to 6.1 percent this year from a high of 9.7 percent in 2007, according to September estimates by the International Monetary Fund. The IMF estimates global production will expand 4 percent.
Guotai’s Zhang said China’s economy will “bottom out” by the second quarter and easing inflation will allow the central bank to reduce interest rates for the first time since 2008. Chinese consumer-price growth jumped to a three-year high of 6.5 percent in July before slowing to 4.2 percent in November, close to the government’s full-year target of 4 percent.
The People’s Bank of China cut banks’ reserve-requirement ratios from a record high for the first time in three years on Nov. 30. The central bank may lower the ratios as much as four times this year to encourage lending to small companies hurt by a credit squeeze, Zhang said. He recommends shares of property developers, brokerages and chemical producers.
Property Curbs
Shenzhen-based China Vanke Co. (000002) and Guangzhou-based Poly Real Estate Group Co. are the nation’s largest publicly traded property companies. Vanke and Poly Real trade at record-low valuations of 6.5 times and 6.6 times estimated profit respectively, data compiled by Bloomberg show.
The companies’ valuations have declined the past two years as the government introduced limits on owning property to cool surging prices. China’s home prices fell for a fourth month in December, according to SouFun Holdings Ltd., the nation’s biggest real estate website. The decelerating economy may spur the government to relax enforcement on property restrictions by the second quarter, Andy Rothman, a China macro strategist at CLSA Asia-Pacific Markets, said in a Dec. 22 interview.
Brokerages underestimated inflation last year, leading to overly optimistic predictions for stocks, according to Hao Kang, a Beijing-based fund manager at ICBC Credit Suisse Asset Management Co., which oversees about $8.3 billion.
Debt Crisis
A sustained rebound for Chinese equities will depend on whether Europe can contain its sovereign debt crisis, CICC’s Hong said. China’s exports to the European Union rose 5 percent in November, a quarter of the pace reported in July and August, according to customs data on Dec. 10. The region accounts for 18 percent of Chinese exports, according to Shanghai-based Shenyin & Wanguo Securities Co.
Premier Wen said China faced “problems of weakening external demand” in his Jan. 3 statement. China will maintain a “prudent” monetary policy and a “proactive” fiscal policy this year, the official Xinhua news agency reported Dec. 10.
Nomura Holdings Inc. forecasts Shanghai’s A shares will rebound between 15 percent and 20 percent in 2012 after valuations dropped to the cheapest in Asia, Michael Kurtz, chief Asian equity strategist, said at a Dec. 19 press conference in Beijing. The brokerage favors Chinese financial, energy and material companies.
Chinese Banks
Industrial & Commercial Bank of China Ltd. (601398), the nation’s biggest lender, and Bank of Communications Ltd., the country’s fifth largest, trade at 6.2 times and 4.9 times estimated earnings, according to data compiled by Bloomberg. That compares with 8.4 times for financial companies in the MSCI Emerging Markets Index.
The Chinese banks may report annual net income increases of at least 19 percent in 2012, analyst estimates (601328) compiled by Bloomberg show.
“We remain positive on Chinese equities,” said Templeton’s Mobius. “China is one of the fastest growing major economies in the world and is expected to play a major role in the global economy.”
Major Brokerages’ Forecasts for Chinese Stocks in 2012 ---------------------------------------------------------- Brokerage Index Target CICC Shanghai Composite none Citic Securities Shanghai Composite *2,800 Shenyin & Wanguo Shanghai Composite 3,000 Guotai Junan Shanghai Composite 3,000 Galaxy Securities Shanghai Composite 3,100 GF Securities Shanghai Composite 3,100 Sinolink Securities Shanghai Composite 3,200 BNP Paribas Shanghai Composite 20-25% Gain UBS Shanghai Composite Up to 30% Gain Citigroup Shanghai A-Share Index **2,400-2,800 Credit Suisse Shanghai A-Share Index 2,900 Nomura Shanghai A-Share Index 15-20% Gain Goldman Sachs CSI 300 Index 3,200 ---------------------------------------------------------- *Citic’s prediction is for the first quarter. **Citigroup sees A share-index trading in range and may reach as high as 3,200
--Zhang Shidong, Allen Wan in Shanghai. With assistance from Zheng Lifei in Beijing and Bonnie Cao in Shanghai. Editors: Darren Boey, Laura Zelenko.
To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai atszhang5@bloomberg.net; Allen Wan in shanghai at awan3@bloomberg.net.
To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net
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