Worst Plunge in Year for China Stocks is Time to Buy, HSBC Says

The worst plunge in China’s stocks in more than a year is a buying opportunity for investors as the country’s benchmark index may advance as much as 15 percent by June, according to HSBC Private Bank’s Arjuna Mahendran.

“The medium-term outlook is good,” said Mahendran, the head of investment strategy for Asia in Singapore at HSBC Private Bank, a unit of Europe’s largest lender overseeing $460 billion globally. “The momentum of the economy is strong. The question is whether it’s too strong.”

The Shanghai Composite Index tumbled 5.2 percent to 2,985.44 yesterday, the most since August 2009, as investors speculated policy makers may raise interest rates for the second time in two months to curb inflation. The measure had a six-week winning streak halted after government reports showed October consumer prices rose at the fastest pace in two years.

Consumer prices jumped 4.4 percent in October, more than the 4 percent median forecast in a Bloomberg News survey of 28 economists, the statistics bureau reported Nov. 11. The previous day, the government had announced the first nationwide increase in bank reserve requirements since May, which Guotai Junan Securities Co. said would fail to drain funds from the financial system because there is “too much liquidity.”

The Shanghai Composite climbed 1 percent on Nov. 11, the day after the ratio increase, before yesterday’s tumble.

“Regulators have been clear they wouldn’t condone rising prices,” Mahendran said in a phone interview. “Inflation is going to be an issue for the next six to 12 months.”

Stay Cautious

While rate “normalization” will be a “headwind” for stocks, Mahendran predicted that China’s equity market will extend its rally since July.

“This is an opportunity to buy stocks at decent prices,” said Mahendran, who foresaw a decline in China’s equities on Jan. 20 and said on July 29 that a mid-year rally in equities would falter should the government be able to contain inflation.

The Shanghai Composite slumped 8.8 percent in January. The gauge rose less than 0.1 percent in August after a 10 percent surge the previous month. Consumer prices jumped 3.5 percent in August, accelerating from July’s 3.3 percent increase.

Zhao Zifeng, who helps oversee about $10.2 billion at China International Fund Management Co., said investors should be wary after yesterday’s stock tumble given the lack of clarity over the government’s tightening policies.

“The plunge may not fully reflect further tightening by the government such as interest-rate and reserve requirement increases,” he said in a phone interview in Shanghai. “I would say it’s better to be cautious.”

Economic Growth

The Shanghai gauge has rebounded 26 percent since reaching this year’s low on July 5 on expectations central banks around the world will inject more cash into their economies to boost growth. The index remains down 8.9 percent this year after the government raised bank reserve requirements, including a percentage-point increase for some banks, and curbed lending growth to cool the economy.

Companies in the stock gauge are valued at 19.2 times reported earnings, compared with 26.4 times at the beginning of the year, according to weekly data compiled by Bloomberg.

Mahendran recommends Chinese consumption stocks including retailers given the nation’s growth outlook. China’s economy grew 9.6 percent in the third quarter, exceeding the 9.5 percent median estimate of economists in a Bloomberg News survey. Moody’s Investors Services upgraded China’s debt rating this week, citing the resilience of the economy.

“You just have to wait for the dust to settle,” he said. “The trend is upward. I’m not too concerned. I see gains for the index of between 10 percent to 15 percent by June next year.”

--Allen Wan, Zhang Shidong. With assistance from Irene Shen. Editors: Darren Boey, Eric Martin

To contact the reporter on this story: Allen Wan at awan3@bloomberg.net.

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net.

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