SHANGHAI: China's stocks are likely to rebound from their worst quarterly drop since last year's bear market as inflation stabilizes and the yuan gains against major currencies, according to Baring Asset Management (Asia) Ltd.
"China is not expensive," said Khiem Do, Hong Kong-based head of multi-asset strategy at Baring Asset Management (Asia) Ltd, which oversees $11 billion. Investors will "feel a lot more comfortable" if inflation peaks at "3 to 4 percent" as that may signal the end of "policy normalization" by the central bank, he said.
A 5.1 percent plunge for the Shanghai Composite Index last quarter cut valuations to 29.1 times reported earnings, down 23 percent from last year's high of 37.7 times in August, according to weekly data compiled by Bloomberg.
Chinese stocks fell after the central bank twice ordered banks to set aside more money as reserves to rein in record new lending and slow the world's third-biggest economy.
The nation's inflation rate accelerated to 2.7 percent in February, the fastest in 16 months, after food prices climbed and industrial production rebounded. Premier Wen Jiabao last month set a target to control consumer prices at about 3 percent.
Do added Chinese property stocks as housing prices "haven't fallen and volumes are picking up" while banks have reported "spectacular" earnings. His Asia Balanced Fund has gained 11 percent over the past five years, beating 97 percent of its peers, according to data compiled by Bloomberg.
Among his holdings at the end of last year was Industrial & Commercial Bank of China Ltd, the world's largest bank by market value.
'Very bullish'
A resumption in the yuan appreciation will be "very bullish" for China's stock market, he said. Yuan forwards rose on Wednesday, trading near the highest level in more than two weeks, on speculation the central bank will allow the currency to gain.
China's manufacturing expanded at a faster pace in March, a report showed on Thursday, putting pressure on government to consider raising interest rates and allow gains in the yuan for the first time since mid-2008.
The government is considering widening the yuan's trading band next month, Caijing magazine reported, without saying where it got the information.
China is facing renewed pressure to loosen controls on the currency to help offset global imbalances in trade, most notably from the United States, which says an undervalued yuan gives Chinese exporters an unfair advantage.
