CITIC and CICC say the equity will rally in the second half of the year
LONDON - The lowest Chinese stock valuations since economic growth collapsed three years ago have sent a signal to the country's biggest brokerages that it's time to buy.
The Shanghai Composite Index's 6.2 percent retreat this quarter sent the gauge to 11.6 times estimated profit, data compiled by Bloomberg show. It took the global financial crisis and a decline in China's growth rate to a seven-year low of 6.8 percent to push valuations this low in November 2008. The Shanghai gauge rebounded 49 percent in the next six months.
CITIC Securities Co and China International Capital Corp, which predicted the drop this quarter, say the market will rally in the second half as inflation peaks and the government sustains the economic expansion by easing credit. Even Nouriel Roubini, the New York University economist who says China may face a "hard landing" after 2013, expects growth of at least 8.8 percent in 2011 and 2012.
"The market has basically priced in a very pessimistic outlook for the economy," said Ling Peng, chief strategist at Shanghai-based Shenyin & Wanguo Securities Co, ranked China's most influential research provider by New Fortune magazine last year. "A hard landing of the economy is very unlikely," he said, forecasting that the Shanghai index will advance as much as 15 percent by the end of the year to about 3150.
The gauge of more than 900 stocks traded mostly by local investors has trailed the MSCI Emerging Markets Index by 1.5 percentage points this quarter as the People's Bank of China raised lenders' reserve requirements for the 12th time since the start of 2010 and increased benchmark interest rates for the fourth time. Tighter monetary policy has spurred a drop in loans, cut money supply growth to the slowest pace since 2008 and sent short-term borrowing rates to a three-year high.
The government is curbing credit to tame consumer prices that boosted inflation to 5.5 percent last month, the highest level since July 2008. Retail sales trailed estimates in the past two months as rising prices eroded the buying power of China's 1.3 billion people.
The Shanghai index rallied 3.9 percent to 2746.21 last week after Premier Wen Jiabao wrote in an opinion piece in the Financial Times that China's efforts to stem inflation have worked and the pace of price increases will slow.
Beijing-based Bank of China Ltd has a price-to-book ratio 40 percent below its five-year average, according to data compiled by Bloomberg.
China Vanke Co is valued at a 50 percent discount to the MSCI's gauge of global real estate companies, compared with a 10 percent discount two years ago, the data show. Shares of the Shenzhen-based company climbed 4.1 percent last week.
"The tightening that China has done for the last 18 months has been effective and seems to be coming towards an end," said Philippe Langham, who runs the $855 million RBC Emerging Markets Fund from London. The government "still seems to have a large amount of control" over the economy, he said.
China's expansion, which has averaged more than 10 percent during the past decade, may slow to 9.5 percent this year, according to the median estimate of 11 economists surveyed by Bloomberg. The outlook compares with projected global growth of 4.3 percent, according to June forecasts from the Washington-based International Monetary Fund.
Nouriel Roubini, the co-founder of New York-based research firm Roubini Global Economics LLC, and who predicted the worldwide financial crisis, said in a June 11 interview that China's reliance on exports and investment may spur "massive" non-performing loans and cause the expansion to falter after 2013.
Credit Suisse Group AG cut its earnings forecasts for Shanghai index companies and advised reducing bank holdings in a June 20 research report. A surge in "off-balance-sheet" financing may force policy makers to clamp down on credit growth for longer than investors anticipate, according to Hong Kong-based analysts Vincent Chan and Peggy Chan. Chinese profits may increase 10 percent this year and next, weighed down by banks' non-performing loans, the analysts wrote.
Roubini Global still sees Chinese growth of 9.1 percent this year and 8.8 percent next year, according to the firm's web site. Credit Suisse predicts an expansion of 8.7 percent this year and 8.5 percent in 2012. The Zurich-based bank has a target of 3000 for the Shanghai index.
"There are some underlying problems for the long term but the situation isn't as bad as some investors' forecast," said Pan Jiang, a Shanghai-based money manager at Franklin Templeton Sealand Fund Management Co, which oversees the equivalent of more than $2.6 billion. "We shouldn't underestimate the government's insight into the situation and its power to control the risks."
Shanghai index profits will jump 32 percent in the next 12 months, topping the 19 percent growth rate for the MSCI emerging-market index, according to the average of more than 14,000 analyst estimates compiled by Bloomberg.
CITIC Securities recommended shares of property developers and cement companies because of the government's housing measures. China's biggest brokerage, which turned "positive" on the nation's stocks in a June 20 report after being "cautious" since April, has a six-month target of 3500 for the Shanghai index.
Bloomberg News
