CLSA Raises `Overweight' in H Shares on Yuan Gain, Trims Taiwan Weighting

CLSA Asia-Pacific Markets raised its weighting for Chinese shares traded in Hong Kong and cut Taiwan stocks after China relaxed the yuan’s peg to the dollar, strategistChristopher Wood said in his Greed & Fear report.

The “overweight” for H shares was increased by 1 percentage point and Taiwan’s “overweight” trimmed by the same amount. A stronger yuan may aid China’s domestic-demand stocks and further threaten profit margins for Taiwanese exporters that are already grappling with rising wages, Wood said.

The yuan, also known as the renminbi, is poised for its biggest weekly gain since December 2008 after the People’s Bank of China said on June 19 it would end a two-year peg to the dollar and manage the yuan with reference to a basket of currencies. The Hang Seng China Enterprises Index jumped 4.4 percent on June 21 while Taiwan’s Taiex index gained 1.9 percent.

“The move is a tactical positive since it has further delayed the still likely onset of a row between China and America on trade,” Wood said. “Taiwan is at the margin the loser because renminbi appreciation is a further threat to the profit margins of Taiwan exporters with mainland operations.”

CLSA remains concerned about a deterioration in demand for technology products amid Europe’s sovereign-debt crisis, though Taiwan’s stocks have “to a large extent discounted” the impact of rising costs, said Wood, the second-ranked Asia strategist in Institutional Investor’s 2010 poll.

Foxconn

The Taiex has dropped 8.1 percent this year, the third- biggest decliner in Asia after the Shanghai Composite Index and Australia’s S&P/ASX 200 Index. The “lackluster” performance of the stock market reflects the failure of the Economic Cooperation Framework Agreement with China to provide “bullish catalysts,” Wood said.

For China’s yuan-denominated shares, Wood said that a “bottom” will likely come later, after a rebound this week, given the “aggressive tightening” in the nation’s residential property market.

Still, it’s “too late” to underweight China as there is now a “significant valuation case” for the nation’s big-cap domestic equities, according to yesterday’s report.

Taiwan’s central bank unexpectedly raised its benchmark interest rate for the first time since 2008, joining Asian policy makers from China to Malaysia in signaling confidence the global recovery will withstand Europe’s debt woes.

To contact the reporter on this story: Shiyin Chen in Singapore at schen37@bloomberg.net

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