China Stocks' Best Forecaster Predicts Further Slump (Update1)
2011-01-05 08:20:47.947 GMT
(Updates with today's market decline in fourth paragraph.)
By Bloomberg News
Jan. 5 (Bloomberg) -- China's stocks may slump for a second
year as the central bank raises interest rates to tame inflation,
according to Zhang Kun, the strategist at Guotai Junan
Securities Co. who correctly predicted last year's drop.
"There will be no gains again," Zhang, whose Shanghai-
based firm Guotai Junan is the nation's second-largest brokerage
by revenue, said in an interview. "Inflation is the biggest
risk. The government will keep tightening."
Guotai Junan is alone among China's major brokerages in
predicting declines for 2011. Citic Securities Co., China's
biggest listed brokerage, and Shenyin & Wanguo Securities Co.,
voted the nation's most influential research unit by New Fortune
magazine, forecast gains of at least 25 percent in the benchmark
Shanghai Composite Index. China International Capital Corp., the
only other major Chinese brokerage to correctly forecast the
index's drop in 2010, also expects an advance this year.
The Shanghai Composite fell 14 percent in 2010 to 2808.08,
making it the worst performer among benchmark indexes in the
world's 10 biggest markets, according to data compiled by
Bloomberg. Premier Wen Jiabao's government ordered banks to set
aside more reserves six times and boosted rates twice since
October to tame inflation and curb asset bubbles after record
gains in lending and property prices. The index dropped for the
first time in five days today, losing 0.5 percent to 2,838.59.
The central bank will keep increasing borrowing costs to
cap inflation at around 4 percent this year after it reached a
28-month high of 5.1 percent in November, Zhang said. Last March,
he said the Shanghai gauge, which had already dropped 9.2
percent, would fall a further 17 percent to 2,500 in the first
half as the government boosted measures to cool economic growth.
The index slid 27 percent in the first six months of 2010.
'Trend Up'
Hao Hong, global equity strategist at CICC, the top-ranked
brokerage for China research in Asiamoney magazine's annual
survey, expects the Shanghai gauge to rebound as the economy
grows more than 8 percent and inflation eases.
Last January, Hong predicted stocks would fall in the first
six months as the government reined in property speculation. The
Shanghai Composite dropped in the first half before rebounding
25 percent between July 1 and the end of October.
"China's stocks will trend up in 2011, but it will be
volatile," said Hong, who is based in Beijing. "A continuing
global recovery and sustained Chinese growth should support the
market." Hong said he favors commodity producers, agriculture
and health-care companies. Both Hong and Zhang declined to give
a yearend target for the Shanghai Composite in 2011.
Investor Mark Mobius and Jing Ulrich, chairwoman of China
equities and commodities at JPMorgan Chase & Co., say China's
stocks are set to rebound because the government will keep
inflation under control.
'Perform Well'
China's purchasing managers' index fell to 53.9 last month
from 55.2 in November, the nation's logistics federation and the
statistics bureau said Jan. 1.
CICC estimates consumer prices rose 4.5 percent in December
from a year earlier, while Bank of America Corp. forecast 4.8
percent. The inflation rate jumped 5.1 percent in November on
surging food prices after a 4.4 percent gain in the previous
month. The government's annual CPI target is 3 percent.
"We are confident that the Chinese government has the
capability to control inflation at a reasonable level in 2011,"
Mobius, who oversees about $40 billion as executive chairman of
Templeton Emerging Markets Group, said in an e-mailed response
to questions on Dec. 29. "If China can keep the CPI at about 4
percent in 2011, the equity market should perform well."
Rate Laggard
Government leaders have pledged to soak up excessive money
supply that fueled a record gain in property prices and drove up
food costs, which account for a third of the weighting of
inflation. In the so-called Central Economic Work Conference,
attended last month by President Hu Jintao and Premier Wen, the
leaders announced a shift in monetary policies to "prudent"
from "appropriately loose" this year.
"After the Chinese New Year period, we might begin to see
more stability in food inflation," JPMorgan's Ulrich said in a
Dec. 21 interview, referring to the lunar new year that ends by
mid-February. The Hong Kong-based strategist likes consumer and
construction-related stocks as they will benefit from government
efforts to boost domestic consumption and public housing.
China is lagging behind counterparts across Asia that took
steps earlier to raise borrowing costs from global recession
lows. India has lifted its benchmark rate six times since March,
while Malaysia increased it three times, also starting in March.
Taiwan began increasing rates in June and South Korea in July.
"Inflation isn't an issue that's going to be easily
tackled," said Larry Wan, Beijing-based head of investment at
Union Life Asset Management Co., which oversees the equivalent
of $2.21 billion.
Stock Bulls
Last year's drop for China's benchmark gauge was the
biggest since 2008, when the global financial crisis curbed the
nation's exports. The index jumped 80 percent in 2009 as a 4
trillion-yuan ($605 billion) stimulus package and record new
lending helped the economy recover from the slump in growth.
"We'll see tighter monetary policies with new loan growth
to be cut more than the market anticipates," Guotai Junan's
Zhang said, predicting the government will boost rates twice
more and cut the quota for new bank loans from 2010's 7.5
trillion yuan. "Liquidity will be a problem for the market."
Citic, Shenyin & Wanguo, Haitong Securities Co. and Galaxy
Securities Co. are all forecasting gains of more than 20 percent
for the Shanghai Composite. Sinolink Securities Co., based in
the western city of Chengdu, is the most bullish with a
prediction that the index will rise to 4,200 this year, or a 50
percent advance from the 2010 close.
Property Outlook
Among non-Chinese brokerages, JPMorgan is targeting a 20
percent gain, while Citigroup Inc. predicts Shanghai's A-share
index could climb to as high as 4,000. Forecasts for the MSCI
China Index range from 81 at Credit Suisse Group AG and 88 at
UBS AG to 94.5 at Morgan Stanley, the most bullish prediction 42
percent above the 66.6 close at the end of 2010.
The mid-year rebound for the Shanghai Composite faltered in
November after the central bank raised rates on Oct. 19 for the
first time in three years. A measure of property developers was
the worst performer in the index in the last quarter of 2010. A
gauge of banks and real-estate companies plunged 27 percent last
year, the most among the 10 industry groups in the CSI 300 Index,
comprising stocks in the Shanghai and Shenzhen stock exchanges.
Jim Chanos, the hedge fund manager who was one of the first
investors to foresee the 2001 collapse of Enron Corp., said in a
Bloomberg Television interview Dec. 17 that China's property
boom continues "unabated" and has even picked up since the
government enacted policies to cool speculation. Home prices in
70 Chinese cities climbed 7.7 percent in November from a year
earlier, according to the statistics bureau, even after the
government suspended mortgages for third-home purchases and
pledged to introduce a property tax.
Cheaper Stocks
The Shanghai gauge's decline has driven down valuations for
the 913 companies to an average of 18.3 times reported earnings,
compared with the historical average of 30.5 times, according to
data compiled by Bloomberg.
"Current valuations in China, despite having risen from
the lows of early 2009, still remain attractive to us," said
Mobius, who likes commodity and consumer companies in emerging
markets including China. "Over the longer term, markets should
reflect the underlying strong economic growth in the country and
the region."
China's economy grew 10.1 percent last year, according to
the median estimate of 18 economists in a Bloomberg survey. The
expansion will slow to 9 percent this year, three times the rate
of the U.S., Bloomberg surveys show.
Citic predicts the Shanghai Composite may rebound to 3,500
by the end of this year, bolstered by earnings that are growing
at a rate of 22 percent. The brokerage had estimated the gauge
would soar to 4,500 in 2010.
Continued Volatility
Shenyin & Wanguo said the index will jump to 3,800 in 2011
as policy tightening eases. The brokerage cut its 2010 target to
3,000 during its mid-year investment conference in June from the
original forecast of 4,200.
"The index target is subject to revision in the course of
the year with the changes of policies and other factors," said
Fang Bo, a Shanghai-based press official at Shenyin & Wanguo.
China's stocks entered a so-called bear market in May after
the government introduced tightening measures to curb real-
estate speculation. Equities reversed course and entered a bull
market in October as the Shanghai Composite rebounded 20 percent
from the 2010 low in July on an improving economic growth
outlook and faster yuan appreciation.
"We'll probably continue to see a volatile stock market as
long as inflation persists," said Union Life's Wan.
Major Brokerages' Forecasts for Chinese Stocks in 2011
----------------------------------------------------------
Brokerage Index Target
----------------------------------------------------------
Citic Securities Shanghai Composite 3,500
Shenyin & Wanguo Shanghai Composite 3,800
Haitong Securities Shanghai Composite 3,500
Sinolink Securities Shanghai Composite 4,200
Galaxy Securities Shanghai Composite 4,000
Guotai Junan Shanghai Composite No Gain
JPMorgan Shanghai Composite 20% Gain
Citigroup Shanghai A-Share Index 4,000
Credit Suisse MSCI China Index 81
Morgan Stanley MSCI China Index 94.5
UBS MSCI China Index 88
CLSA MSCI China Index 25% Gain
Deutsche Bank MSCI China Index 15% Gain
----------------------------------------------------------
For Related News and Information:
Chinese stocks stories: TNI CHINA STK <GO>
The most-read Chinese stock stories: MNI CHS <GO>
Global stocks stories: TOP STK <GO>
World equity index monitor: WEI <GO>
World equity valuations: WPE <GO>
--Zhang Shidong. With assistance from Shiyin Chen and Reinie
Booysen in Singapore and Li Yanping in Beijing. Editors: Allen
Wan, Eric Martin
To contact Bloomberg News staff for this story:
Zhang Shidong in Shanghai at +86-21-6104-3040 or
szhang5@bloomberg.net
To contact the editor responsible for this story:
Reinie Booysen at +65-6212-1154 or rbooysen@bloomberg.net
2011-01-05 08:20:47.947 GMT
(Updates with today's market decline in fourth paragraph.)
By Bloomberg News
Jan. 5 (Bloomberg) -- China's stocks may slump for a second
year as the central bank raises interest rates to tame inflation,
according to Zhang Kun, the strategist at Guotai Junan
Securities Co. who correctly predicted last year's drop.
"There will be no gains again," Zhang, whose Shanghai-
based firm Guotai Junan is the nation's second-largest brokerage
by revenue, said in an interview. "Inflation is the biggest
risk. The government will keep tightening."
Guotai Junan is alone among China's major brokerages in
predicting declines for 2011. Citic Securities Co., China's
biggest listed brokerage, and Shenyin & Wanguo Securities Co.,
voted the nation's most influential research unit by New Fortune
magazine, forecast gains of at least 25 percent in the benchmark
Shanghai Composite Index. China International Capital Corp., the
only other major Chinese brokerage to correctly forecast the
index's drop in 2010, also expects an advance this year.
The Shanghai Composite fell 14 percent in 2010 to 2808.08,
making it the worst performer among benchmark indexes in the
world's 10 biggest markets, according to data compiled by
Bloomberg. Premier Wen Jiabao's government ordered banks to set
aside more reserves six times and boosted rates twice since
October to tame inflation and curb asset bubbles after record
gains in lending and property prices. The index dropped for the
first time in five days today, losing 0.5 percent to 2,838.59.
The central bank will keep increasing borrowing costs to
cap inflation at around 4 percent this year after it reached a
28-month high of 5.1 percent in November, Zhang said. Last March,
he said the Shanghai gauge, which had already dropped 9.2
percent, would fall a further 17 percent to 2,500 in the first
half as the government boosted measures to cool economic growth.
The index slid 27 percent in the first six months of 2010.
'Trend Up'
Hao Hong, global equity strategist at CICC, the top-ranked
brokerage for China research in Asiamoney magazine's annual
survey, expects the Shanghai gauge to rebound as the economy
grows more than 8 percent and inflation eases.
Last January, Hong predicted stocks would fall in the first
six months as the government reined in property speculation. The
Shanghai Composite dropped in the first half before rebounding
25 percent between July 1 and the end of October.
"China's stocks will trend up in 2011, but it will be
volatile," said Hong, who is based in Beijing. "A continuing
global recovery and sustained Chinese growth should support the
market." Hong said he favors commodity producers, agriculture
and health-care companies. Both Hong and Zhang declined to give
a yearend target for the Shanghai Composite in 2011.
Investor Mark Mobius and Jing Ulrich, chairwoman of China
equities and commodities at JPMorgan Chase & Co., say China's
stocks are set to rebound because the government will keep
inflation under control.
'Perform Well'
China's purchasing managers' index fell to 53.9 last month
from 55.2 in November, the nation's logistics federation and the
statistics bureau said Jan. 1.
CICC estimates consumer prices rose 4.5 percent in December
from a year earlier, while Bank of America Corp. forecast 4.8
percent. The inflation rate jumped 5.1 percent in November on
surging food prices after a 4.4 percent gain in the previous
month. The government's annual CPI target is 3 percent.
"We are confident that the Chinese government has the
capability to control inflation at a reasonable level in 2011,"
Mobius, who oversees about $40 billion as executive chairman of
Templeton Emerging Markets Group, said in an e-mailed response
to questions on Dec. 29. "If China can keep the CPI at about 4
percent in 2011, the equity market should perform well."
Rate Laggard
Government leaders have pledged to soak up excessive money
supply that fueled a record gain in property prices and drove up
food costs, which account for a third of the weighting of
inflation. In the so-called Central Economic Work Conference,
attended last month by President Hu Jintao and Premier Wen, the
leaders announced a shift in monetary policies to "prudent"
from "appropriately loose" this year.
"After the Chinese New Year period, we might begin to see
more stability in food inflation," JPMorgan's Ulrich said in a
Dec. 21 interview, referring to the lunar new year that ends by
mid-February. The Hong Kong-based strategist likes consumer and
construction-related stocks as they will benefit from government
efforts to boost domestic consumption and public housing.
China is lagging behind counterparts across Asia that took
steps earlier to raise borrowing costs from global recession
lows. India has lifted its benchmark rate six times since March,
while Malaysia increased it three times, also starting in March.
Taiwan began increasing rates in June and South Korea in July.
"Inflation isn't an issue that's going to be easily
tackled," said Larry Wan, Beijing-based head of investment at
Union Life Asset Management Co., which oversees the equivalent
of $2.21 billion.
Stock Bulls
Last year's drop for China's benchmark gauge was the
biggest since 2008, when the global financial crisis curbed the
nation's exports. The index jumped 80 percent in 2009 as a 4
trillion-yuan ($605 billion) stimulus package and record new
lending helped the economy recover from the slump in growth.
"We'll see tighter monetary policies with new loan growth
to be cut more than the market anticipates," Guotai Junan's
Zhang said, predicting the government will boost rates twice
more and cut the quota for new bank loans from 2010's 7.5
trillion yuan. "Liquidity will be a problem for the market."
Citic, Shenyin & Wanguo, Haitong Securities Co. and Galaxy
Securities Co. are all forecasting gains of more than 20 percent
for the Shanghai Composite. Sinolink Securities Co., based in
the western city of Chengdu, is the most bullish with a
prediction that the index will rise to 4,200 this year, or a 50
percent advance from the 2010 close.
Property Outlook
Among non-Chinese brokerages, JPMorgan is targeting a 20
percent gain, while Citigroup Inc. predicts Shanghai's A-share
index could climb to as high as 4,000. Forecasts for the MSCI
China Index range from 81 at Credit Suisse Group AG and 88 at
UBS AG to 94.5 at Morgan Stanley, the most bullish prediction 42
percent above the 66.6 close at the end of 2010.
The mid-year rebound for the Shanghai Composite faltered in
November after the central bank raised rates on Oct. 19 for the
first time in three years. A measure of property developers was
the worst performer in the index in the last quarter of 2010. A
gauge of banks and real-estate companies plunged 27 percent last
year, the most among the 10 industry groups in the CSI 300 Index,
comprising stocks in the Shanghai and Shenzhen stock exchanges.
Jim Chanos, the hedge fund manager who was one of the first
investors to foresee the 2001 collapse of Enron Corp., said in a
Bloomberg Television interview Dec. 17 that China's property
boom continues "unabated" and has even picked up since the
government enacted policies to cool speculation. Home prices in
70 Chinese cities climbed 7.7 percent in November from a year
earlier, according to the statistics bureau, even after the
government suspended mortgages for third-home purchases and
pledged to introduce a property tax.
Cheaper Stocks
The Shanghai gauge's decline has driven down valuations for
the 913 companies to an average of 18.3 times reported earnings,
compared with the historical average of 30.5 times, according to
data compiled by Bloomberg.
"Current valuations in China, despite having risen from
the lows of early 2009, still remain attractive to us," said
Mobius, who likes commodity and consumer companies in emerging
markets including China. "Over the longer term, markets should
reflect the underlying strong economic growth in the country and
the region."
China's economy grew 10.1 percent last year, according to
the median estimate of 18 economists in a Bloomberg survey. The
expansion will slow to 9 percent this year, three times the rate
of the U.S., Bloomberg surveys show.
Citic predicts the Shanghai Composite may rebound to 3,500
by the end of this year, bolstered by earnings that are growing
at a rate of 22 percent. The brokerage had estimated the gauge
would soar to 4,500 in 2010.
Continued Volatility
Shenyin & Wanguo said the index will jump to 3,800 in 2011
as policy tightening eases. The brokerage cut its 2010 target to
3,000 during its mid-year investment conference in June from the
original forecast of 4,200.
"The index target is subject to revision in the course of
the year with the changes of policies and other factors," said
Fang Bo, a Shanghai-based press official at Shenyin & Wanguo.
China's stocks entered a so-called bear market in May after
the government introduced tightening measures to curb real-
estate speculation. Equities reversed course and entered a bull
market in October as the Shanghai Composite rebounded 20 percent
from the 2010 low in July on an improving economic growth
outlook and faster yuan appreciation.
"We'll probably continue to see a volatile stock market as
long as inflation persists," said Union Life's Wan.
Major Brokerages' Forecasts for Chinese Stocks in 2011
----------------------------------------------------------
Brokerage Index Target
----------------------------------------------------------
Citic Securities Shanghai Composite 3,500
Shenyin & Wanguo Shanghai Composite 3,800
Haitong Securities Shanghai Composite 3,500
Sinolink Securities Shanghai Composite 4,200
Galaxy Securities Shanghai Composite 4,000
Guotai Junan Shanghai Composite No Gain
JPMorgan Shanghai Composite 20% Gain
Citigroup Shanghai A-Share Index 4,000
Credit Suisse MSCI China Index 81
Morgan Stanley MSCI China Index 94.5
UBS MSCI China Index 88
CLSA MSCI China Index 25% Gain
Deutsche Bank MSCI China Index 15% Gain
----------------------------------------------------------
For Related News and Information:
Chinese stocks stories: TNI CHINA STK <GO>
The most-read Chinese stock stories: MNI CHS <GO>
Global stocks stories: TOP STK <GO>
World equity index monitor: WEI <GO>
World equity valuations: WPE <GO>
--Zhang Shidong. With assistance from Shiyin Chen and Reinie
Booysen in Singapore and Li Yanping in Beijing. Editors: Allen
Wan, Eric Martin
To contact Bloomberg News staff for this story:
Zhang Shidong in Shanghai at +86-21-6104-3040 or
szhang5@bloomberg.net
To contact the editor responsible for this story:
Reinie Booysen at +65-6212-1154 or rbooysen@bloomberg.net
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