The Shanghai Composite Index is poised to gain 15 percent from yesterday’s close to 2,750 by year-end as slowing inflation allows the government to loosen monetary policy and banks to lend more to companies, according to Beijing Gao Hua Securities Co., Goldman Sachs Group Inc.’s partner in China and the firm with the most correct predictions for yuan-denominated A shares in the two years to January 2012, based on Bloomberg Rankings.
The benchmark stock index has climbed 7.9 percent this year on speculation the government will accelerate measures to boost the world’s second-biggest economy after gross domestic product grew at the slowest quarterly pace since 2009. The government said on May 29 it has no plan to introduce stimulus on the scale of measures in 2008, when policy makers unveiled a fiscal package of 4 trillion yuan ($629 billion).
“We remain positive on the market this year,” Wang Hanfeng, China strategist at Gao Hua, said in an e-mailed response to questions. “With inflation easing, there is a shift towards policy loosening which will help improve the liquidity situation and support the valuation expansion of A shares.”
Slowing inflation leaves room for the government to stimulate the economy as policy makers turn their attention to growth, said Wang. A statistics bureau report on May 11 showed China’s consumer prices rose 3.4 percent in April, below the 3.6 percent rate in March and the government’s full-year target of 4 percent. The economy grew 8.1 percent in the first quarter, the least since the three months ending June 30, 2009.
The Shanghai Composite slipped 0.5 percent to 2,372.23 at today’s close. It lost 1 percent this month, compared with a 13 percent plunge in Brazil’s Bovespa Index, the 6.7 percent drop for the BSE India Sensitive Index and the 11 percent slump in Russia’s Micex Index.
Gao Hua’s stock recommendations on Zoomlion Heavy Industry Science & Technology Co. (000157) and Poly Real Estate Group Co. were the most accurate based on an analysis of recommendations on 135 A shares from more than 400 analysts at 43 brokerages. The analysts were ranked according to the accuracy of their estimates between Jan. 1, 2010 and Jan. 9, 2012.
Gao Hua had the highest accuracy rate at 60 percent with 55 correct recommendations out of 88, followed by Capital Securities Corp. (6005) and UBS AG (UBSN), according to Bloomberg Rankings. Masterlink Securities Corp., Morgan Stanley, China International Capital Corp., HuaChuang Securities, JPMorgan Chase & Co. (JPM), Credit Suisse Group AG (CSGN) and Deutsche Bank AG (DBK) rounded out the top 10 brokerages.
Morgan Stanley Huaxin Securities Co., based in Shanghai, said on April 24 that the Chinese index may rally another 30 percent this year, led by banks and developers. Guotai Junan Securities Co., also located in Shanghai, forecasts the gauge may hit 2,800 by the end of the second quarter. Morgan Stanley and Guotai Junan advised buying stocks before the Shanghai gauge’s last bear market ended in July 2010.
Wang has an overweight allocation for stocks in the insurance, property and construction material industries, suggesting investors should hold more of the shares than are represented in benchmark indexes. Gaohua cut the coal industry to neutral from overweight, he said.
Wang recommended Chinese consumer and health-care stocks in April 2010, and they finished among the top three best-performing industries that year even as the Shanghai Composite slumped. A combined 33 percent loss in 2010 and 2011 for the Shanghai index dragged down the gauge’s valuation to a record low of 8.9 times estimated earnings on Jan. 6, according to weekly data compiled by Bloomberg. The index now trades at 10.2 times estimated profit, compared with the MSCI Emerging-Markets Index’s multiple of 9.7 times.
China’s stocks fell yesterday as a May 29 report from the state-run Xinhua News Agency damped speculation of increased government stimulus. Credit Suisse said in a May 28 report that spending in response to China’s economic slowdown will probably range from 1 trillion yuan to 2 trillion yuan.
“The Chinese government’s intention is very clear: It will not roll out another massive stimulus plan to seek high economic growth,” Xinhua reported, without attributing the information. “Current efforts for stabilizing growth will not repeat the old way of three years ago.”
China’s central bank has cut lenders’ reserve-requirement ratios three times since November, fueling speculation the government will allow banks to lend more to cash-strapped companies and step up investment. New bank lending was 681.8 billion yuan in April, down 32 percent from the previous month, central bank data showed on May 11.
China will start a number of “key infrastructure projects that are vital to the overall economy and can facilitate growth” and speed up construction of railway, environmental protection and rural projects, the government said on May 23, summarizing a meeting of the State Council, or cabinet.
The government suspended construction of new railway projects last year after a high-speed train crash killed 40 people in July and banks cut loans for investment projects as consumer prices jumped to a three-year high that same month.
“New lending may accelerate” in the second quarter, said Wang, who was previously a strategist at CICC, the top-ranked brokerage for China research in the annual survey by Asiamoney magazine. “We may also see accelerated approvals of investment projects including the resumption of some halted railway and infrastructure projects.”
Goldman and Gao Hua (GS) are partners in China in domestic securities trading, investment research, private wealth management and asset management, according to Vicki Kwong, a Beijing-based spokeswoman at Goldman Sachs. Gao Hua’s research reports are co-branded and its analysts work closely with their Goldman counterparts, though neither company holds an equity stake in the other, Kwong said.
The two-year stock market slump has created “more scrutiny on investment ideas,” Kelvin Koh, director of Greater China research at Goldman Sachs, said in a phone interview from Beijing on April 26. “People are more focused on what the sell-side can deliver in a difficult environment.”
Zoomlion, China’s second-largest construction machinery maker, has gained 18 percent since Gao Hua analyst Tian Lu upgraded the stock to buy from neutral on April 5, compared with a 3 percent advance for the Shanghai Composite, data compiled by Bloomberg show.
Gao Hua has the equivalent of a buy rating on shares of Poly Real Estate, the second-biggest Chinese developer. The stock may advance another 17 percent after climbing 36 percent this year, according to Gao Hua’s share-price estimate on Bloomberg. The Guangzhou-based company’s price-to-earnings ratio has declined to 12.8 times from an average of 28.3 times during the past five years, data compiled by Bloomberg show.
“The overall policy of the property market may remain relatively tight but some fine-tuning may be seen at local-government levels,” Wang said. “The risk of a hard landing for China is pretty low.”
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