Chinese companies traded in Hong Kong will outperform mainland stocks in the first half of next year as U.S. stimulus measures drive funds into the city and China policy tightening intensifies, according to Robeco Hong Kong Ltd.
The Hang Seng China Enterprises Index has fallen 6.3 percent since Nov. 12, when Goldman Sachs Group Inc. recommended clients exit a 2010 bet that Hong Kong-listed Chinese stocks, or H shares, will gain. The CSI 300 Index has slid 3.8 percent in the same period as the government twice ordered banks to set aside larger reserves after raising interest rates in October to tame accelerating inflation.
“H shares may outperform in the first half and A shares may outperform in the second half,” Victoria Mio, senior portfolio manager at Robeco, which oversees $196 billion, said in a phone interview from Hong Kong yesterday. “The markets will be quite similar to this year, up-and-down market, but overall going up.”
The Hang Seng China Enterprises Index of 40 companies has advanced 0.1 percent this year before today, compared with an 11 percent drop for the CSI 300, which comprises 300 A share stocks listed on the Shanghai or Shenzhen stock exchanges.
The Federal Reserve’s quantitative easing program will spur more funds into Hong Kong, while the Chinese government may attempt to limit money from entering the country to curb asset bubbles and slow inflation, Mio said.
Fed Chairman Ben S. Bernanke said in an interview broadcast on Dec. 5 by CBS Corp.’s “60 Minutes” program that central bank purchases of Treasuries beyond the $600 billion announced are “possible” given that U.S. unemployment may take five years to fall to a normal level.
“While the quantitative easing is going on, it will give a push to the stock market in H shares but less so for A shares,” Mio said. “Once quantitative easing is over, China’s tightening moves may also be eased, A shares will positively react to less tightening and then the H shares will have less of a push from the quantitative easing in the second half.”
Hong Kong has no restrictions on equity purchases by foreigners while China allows only qualified overseas institutional investors to invest in mainland shares under the current combined quota of $30 billion. The city’s currency peg to the U.S. dollar prevents its monetary authority from raising rates.
China’s policymakers may be “more aggressive” than investors anticipate with policy tightening measures next year. Mio said. The central bank may boost rates by a quarter of a percentage point in each of the three months, raise reserve requirements for banks and allow the yuan to appreciate by up to 8 percent against the dollar, she said.
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 government’s full-year inflation target is 3 percent.
The government will probably raise rates by 75 basis points in the next seven months, Deutsche Bank AG said in a report yesterday. Standard Chartered Plc predicted four more rate increases by the end of June, while Credit Suisse Group AG said China may boost borrowing costs by about 150 basis points by the end of next year. A basis point is 0.01 percentage point.
The period around this weekend may be a “window” for China to raise rates, the China Securities Journal reported on its front page today, citing analysts at domestic banks and brokerages.
“The government has learned from the last tightening that they can’t be too slow,” said Mio. “The general growth is going to push the stock market upward but the tightening is going to create volatility in between.”
China’s yuan-denominated stocks are “relatively cheap,” and will remain “relatively reasonable,” Mio said. The CSI 300 trades at 18.7 times reported earnings, compared with 22.4 at the start of 2010.
Mio’s top picks in China are consumer discretionary and technology stocks. She has an “underweight” allocation for financial, material and consumer staples companies. The government’s curbs on bank lending are expected to damp outlook for banks and property developers, Mio said.
Robeco is part of Rabobank Group.
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