Investors should buy stocks that rely on China’s economic expansion including Jiangxi Copper Co. and Ping An Insurance Group Co. after Premier Wen Jiabao announced this week the government will fine-tune policies at an “appropriate time,” Shen Minggao, the Hong Kong-based head of China research at Citigroup, said in a report today.
“More catalysts in policy and fundamentals are possible to lay a solid footing for a year-end rally,” Shen said. “There is more upside than downside going forward. The market momentum may carry on in the near term.”
The Shanghai Composite Index, China’s benchmark measure, rallied for a fifth day and was set for the biggest weekly advance in a year. The stocks gauge climbed 1.4 percent to 2,470.72 at 9:39 a.m. local time. The Hang Seng China Enterprises Index of Chinese stocks listed in Hong Kong added 3.3 percent today, extending an 18 percent rally this week.
Citigroup joined UBS AG (UBSN) and Barclays Plc in predicting a policy easing after Premier Wen signaled the government is poised to end a two-year monetary tightening campaign as inflation slows and economic growth decelerates.
China’s inflation rate eased to 6.1 percent in September from a three-year high of 6.5 percent in July. The economy grew 9.1 percent in the third quarter, the least in nine quarters.
It’s a good time to be “less defensive” in Chinese stocks, UBS strategist John Tang said in a note yesterday. UBS boosted its rating for consumer discretionary stocks to “overweight” and upgraded the construction, machinery and shipping industries to “neutral’ from ‘‘underweight.’’
Liquidity conditions have probably ‘‘bottomed’’ in the near term and the slowing in producer and consumer price inflation may help to support earnings, Citigroup’s Shen said. Europe’s plan to stem the region’s sovereign-debt crisis will also ‘‘comfort” the market temporarily, Shen wrote.
European leaders persuaded bondholders to take 50 percent losses on Greek debt and resolved to increase the size of the rescue fund, responding to global pressure to step up the fight against the financial crisis.
Citigroup advised buying cyclical shares that have lagged behingd the recent rebound in stocks. Its top picks include ZTE Corp., Nine Dragons Paper Holdings Ltd., Guangzhou Pharmaceutical Co. and China Merchants Bank Co.
China Stock Performance
Even with this week’s rally for the Shanghai Composite, the index is headed for its biggest monthly decline in six years excluding the 2008 global financial crisis. The measure has gained 5 percent in October, trimming the 2011 loss to 12 percent. The central bank has raised interest rates three times in 2011 and ordered lenders to set aside a bigger portion of their deposits to curb inflation that’s near a three-year high.
The Shanghai measure is valued at 11.3 times estimated earnings, compared with a record low of 10.7 times on Oct. 21, according to data compiled by Bloomberg.
Officials will make adjustments at a “suitable time and by an appropriate degree” and will maintain “reasonable” growth in money supply, Wen said during a visit to Tianjin, according to a statement published on the government’s website on Oct. 25.
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