‘Liquidity Wave’ to Boost China, Asia Stocks, RBS Says

Royal Bank of Scotland Group Plc turned bullish on stocks in China and the rest of Asia, saying they will benefit from a global “liquidity wave” as central banks around the world reverse their tightening policies.

China’s “relative valuations, liquidity conditions and ownership levels are now more attractive after a long period of substantial underperformance,” Emil Wolter and Dylan Cheang, Singapore-based analysts at Royal Bank of Scotland, wrote in a report sent yesterday. The analysts raised their view on China and Asian stocks to “overweight” from “underweight.”

The MSCI China Index of mostly Hong Kong-traded Chinese companies has gained 11 percent in the past 12 months, compared with 15 percent for the Asia Pacific excluding Japan gauge. It trades at 15.9 times reported earnings, compared with 16.6 times for the rival gauge. The Shanghai Composite Index, the measure for mainland-traded stocks, rallied for a sixth day, gaining 0.6 percent to 2,879.64 at the 3 p.m. close. It has rebounded 22 percent from the 2010 low on July 5, entering a bull market this week on signs the nation’s economic growth will remain resilient and the government will loosen curbs on bank lending.

Chinese banks extended a more-than-estimated 595.5 billion yuan ($89 billion) in new local-currency loans last month, according to the People’s Bank of China. The median forecast in a Bloomberg News survey of 18 economists was 500 billion yuan.

M2, the broadest measure of money supply, rose 19 percent in September from a year earlier, the central bank added. That compared with economists’ 18.9 percent median estimate.

Stocks also gained as U.S. Federal Reserve minutes showed policy makers last month were prepared to ease monetary policy “before long” and focused on purchases of Treasury securities and boosting inflation expectations as ways to add stimulus.

‘Liquidity Wave’

“A reversal in global economic policies is unleashing a second liquidity wave,” the RBS analysts wrote. “The near-term consequence will likely be a renewed surge in excess liquidity available for short-term financial speculation.”

Wolter joins other strategists in growing more positive on the nation’s stocks. China may extend its rally since the end of the nation’s weeklong National Day holiday as economic fundamentals remain solid and valuations aren’t demanding, China International Capital Corp.’s Hao Hong said Oct. 11.

China’s stocks are in a “solid bull market” and the nation’s indexes may rise 20 percent in the next six months, according to Robert Lutts, president and chief investment officer of Cabot Money Management.

“I like growth in the economy, I like valuations and I think profitability will be very strong,” Lutts, based in Salem, Massachusetts, wrote in e-mailed comments. “I now have a large weighting in China.”

Mobius View

Mark Mobius, who oversees about $40 billion as chairman of Templeton’s emerging markets group, said yesterday the rally in Chinese stocks is “going to continue” and is “sustainable” as investors increase purchases in a market that has lagged behind gains in Asia.

Hong Kong’s Hang Seng Index, where eight of the 10 biggest stocks by weighting are Chinese companies, may rise to 26,500 by the end of 2011, according to Citigroup Inc. The brokerage raised its forecast from 23,050, citing improved earnings expectations and a higher target multiple, according to a report by analysts including Anil Daswani.

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