UBS Sees Economy-Led China Stock Rally Within Six Months

China’s stocks will enter a “bull rally” in the next three to six months as the government drafts details of the next five-year economic plan and property sales rise, according to UBS AG.

Deregulation of cross-border investment, suspension of power supply to wasteful industries, and liberalization of private-sector investment will also spur gains in the country’s stocks, John Tang, Hong Kong-based strategist at UBS, said in a report. The brokerage raised its rating on China’s real-estate industry to “overweight” from “neutral,” and reiterated its “overweight” recommendation for the consumer, internet, machinery, cement/construction, and oil and gas industries.

“Investors should be more aggressive on their sector positioning and would view any market dip as an opportunity to add more cyclical sectors from now on,” Tang said in the report. “We expect a switch from a range-bound market to a bull rally in the next three to six months.”

The MSCI China Index, which measures mostly Hong Kong- traded Chinese companies, has rebounded 16 percent from this year’s low on May 25. Stocks have advanced on signs that China’s economy is stabilizing and as investors speculated the government will hold off issuing new measures to curb the property market. The gauge lost 0.3 percent to 64.69 at 10:59 a.m. in Hong Kong.

BNP Paribas also raised its recommendation on the Chinese property industry to “positive” from “neutral,” saying regulators probably won’t introduce further measures to curb the real estate market as they focus on enforcing existing policies, according to a report by Frank Chen dated today.

Property Curbs

The Shanghai Composite Index, which tracks the bigger of mainland China’s two exchanges, has tumbled 21 percent this year as the government imposed tightening measures ranging from restrictions on multi house purchases to a 7.5 trillion yuan ($1.1 trillion) annual limit on new lending by banks. Authorities have also pledged to boost land supply and the construction of low-cost public homes.

China has no new policy on the property industry, China Banking Regulatory Commission Vice Chairman Jiang Dingzhi said at a forum in Shanghai Sept. 17.

The MSCI China Index has a forward dividend yield of 2.86 percent, higher than the 2.75 percent for the 10-year U.S. Treasury, according to the UBS report. The last time that happened in the fourth quarter of 2008, the Chinese equity market “bottomed” and rallied three months later, the report said.

‘No-man’s Land’

Goldman Sachs Group Inc. said Sept. 17 that Chinese stocks face a “bumpy” time in coming months due to banking and property policy concerns, weakness in overseas demand and the upcoming five-year economic plan.

The country’s equities reached a “bottom” in June and may trade range bound, according to Todd Martin, equity strategist in Asia for Societe Generale in a Bloomberg Television interview.

“We need to pass this low patch of growth between now and the end of the year; things will probably start picking up better into next year,” he said. “We could get into a patch of relative no-man’s land.”

--Chua Kong Ho in Shanghai. With assistance by Rishaad Salamat in Hong Kong, Chen Shiyin in Singapore and Zhang Shidong in Shanghai. Editors: Richard Frost, Allen Wan

To contact the Bloomberg News staff on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net

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