Chinese Stocks Deliver Best Asia Returns as Baring Predicts Bigger Advance

Chinese stocks will extend gains that made the Shanghai Composite Index the best performer among major Asian markets in the first quarter as inflation concerns ease, RCM Asia Pacific Ltd. and Baring Asset Management said.

The benchmark gauge climbed 4.3 percent in the first three months of this year, outpacing indexes in Brazil and India, after sinking 14 percent in 2010. Even after the advance, the Shanghai measure trades for 13.7 times estimated profit, within 10 percent of the lowest level since January 2009, according to data compiled by Bloomberg. The index rose 1.3 percent to 2,967.41 at the 3 p.m. close today, the most in four weeks.

Interest-rate increases may slow after the central bank raised borrowing costs three times since October to cool inflation, according to Khiem Do, the head of Asian multi-asset strategy at Baring Asset’s Asia unit in Hong Kong, who said he’s buying banks and property shares. Technology and consumer companies are attractive, said Mark Konyn, chief executive officer at RCM, a unit of Allianz Global Investors.

“We are adding China names to regional portfolios and have been doing so over the past month believing that the market had started to form a base,” Konyn, who helps manage more than $15 billion at RCM in Hong Kong, said in an e-mailed response to questions. Inflation is likely to “level off” about mid-year and RCM has “positioned portfolios accordingly,” he said.

Record Profit

China’s stocks rebounded this year on signs the economy is weathering policy tightening measures as manufacturing expands and corporate earnings grow. Profits for listed companies may rise as much as 25 percent on average in 2011, compared with 32 percent growth last year, Citic Securities Co. said in a February report. Companies from Anhui Conch Cement Co., the biggest cement producer, to Industrial & Commercial Bank of China (601398) Ltd., the world’s largest lender by market value, reported better-than-estimated annual earnings as the Chinese economy, the world’s second biggest, grew 10.3 percent in 2010.

Manufacturing growth accelerated for the first time in four months in March, the China Federation of Logistics and Purchasing said in a statement today. A separate measure of manufacturing released by HSBC Holdings Plc also gained.

“The turnaround has largely been due to positive earnings results and valuations are at reasonable levels,” Pauline Dan, Hong Kong-based chief investment officer at Samsung Asset Management, which oversees about $72 billion, said in e-mailed comments. “We are currently bullish on the China market because we think that monetary tightening will take a breather.”

Bank Lending

The central bank boosted reserve requirements for lenders nine times since the start of last year and pushed the benchmark one-year lending rate to 6.06 percent to counter inflation. Consumer prices rose 4.9 percent in January and February, exceeding the government’s full-year target of 4 percent, after hitting a 28-month high of 5.1 percent in November. All 20 economists in a Bloomberg News survey this month forecast another rate increase by the end of the second quarter.

“The market can still do well with rate hikes,” Baring’s Do, whose company oversees about $13 billion, said in a phone interview. “It is the quantity of money such as bank lending rather than rates that is important. We had been neutral on China and now we are slightly overweight.”

Domestic banks offered 1.58 trillion yuan ($241 billion) of new loans in the first two months of this year, 25 percent less than the same period a year earlier, according to the central bank. The Shanghai Composite’s 14 percent slump in 2010 was the most among benchmark indexes among the world’s 10 biggest markets, on concern lending growth will spur asset bubbles as property prices posted record gains.

Stocks Caution

Citic, China’s biggest listed brokerage, said it’s “cautious” about stocks in the second quarter because oil prices are likely to stay high and growth may slow in Europe amid budget deficits, according to a March 28 report. Oil prices rose 17 percent in the quarter, boosted by unrest in Libya, which has the largest proven reserves in Africa.

Union Life Asset Management Co.’s Larry Wan said he isn’t adding to his China stock holdings as the tightening measures may slow economic growth more than estimated.

“I am cautious about the stock market in the second quarter,” Wan, Beijing-based head of investment at Union Life, which manages the equivalent of $2.2 billion, said in a phone interview. “It looks like the market’s a bit overly optimistic and hasn’t fully priced in a slowdown in economic growth. The optimistic view may change after the release of first-quarter earnings results.”

Profit for major Chinese listed companies is expected to grow up to 27 percent in the first three months, Shenyin & Wanguo Securities Co. said in a March 28 report.

Outflows Slow

China-related stock funds had outflows of $80.6 million for the week ended March 23, compared with record redemptions of $455.4 million in February, according to Citigroup Inc., citing research firm EPFR Global. China’s exchange-traded funds took in $601 million in March, the heaviest inflows since December 2009, TrimTabs Investment Research said in a report this week.

Goldman Sachs Group Inc., Morgan Stanley and Deutsche Bank AG all turned bullish on Chinese equities last month. Odds the government will ease tightening have increased after Japan suffered its largest earthquake on record on March 11, Morgan Stanley said in a report March 15. A one-percentage-point growth slowdown in Japan’s economy may cut China’s exports by 0.2 percentage point, Shenyin & Wanguo said in a March 14 report.

BRIC Valuations

Only Russia outperformed China in the first quarter among the BRIC nations. The Micex Index (INDEXCF) rallied 7.4 percent as the world’s largest energy exporter benefited from surging oil prices. Brazil’s Bovespa Index fell 1 percent, while India’s Bombay Stock Exchange Sensitive Index dropped 5.2 percent.

The Russia and Brazil gauges trade below 11 times estimated profit, cheaper than the Shanghai Composite. Speculation the government will delay rate increases and corporate earnings will expand have spurred buying that pushed up valuations in the Chinese index since it reached a two-year low in January.

“Stocks will do well in the second half of the year as inflation may ease in June or July,” said Shen Yang, a Shanghai-based fund manager at Lombarda China Fund Management Co., a venture with Italy’s fourth-biggest bank. “Current valuations are low.”

China’s consumer stocks led gains in the first quarter on speculation they will benefit from government efforts to make consumption the main driver for economic growth over the five years ending 2015.

Consumer Stocks

Anhui Jianghuai Automobile Co., a unit of China’s biggest light-truck exporter, rallied 23 percent in the first three months while Gree Electric Appliances Inc. (000651), the country’s largest maker of home air-conditioners, climbed 25 percent.

Anhui Jianghuai’s more than threefold jump in 2010 profit beat analysts’ estimates, according to Bloomberg data. Gree’s earnings growth forecast was increased from this year through 2013 by an average of 8 percent at Sinolink Securities Co. after profit rose 47 percent in 2010.

“Tightening is reasonably advanced, valuations are becoming more attractive and the economy and earnings are growing reasonably well,” said Baring Asset’s Do, whose Global Opportunities Umbrella Fund has beaten 98 percent of rivals over the past five years according to data compiled by Bloomberg. “I have become a bit more bullish on China.”

--Zhang Shidong and Allen Wan in Shanghai. With assistance from Irene Shen. Editors: Darren Boey, Stephen Kirkland

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at +86-21-6104-3040 or szhang5@bloomberg.net; Allen Wan at +86-21-6104-3041 or awan3@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.