China Stocks May Rise 21% on Valuations, Daiwa’s Yuihama Says

The Shanghai Stock Exchange Composite Index may rise 21 percent this year as low valuations and easing inflation concerns attract investors, said Hirokazu Yuihama, a strategist at Daiwa Institute of Research.

The index may climb to 3,400 from its Dec. 31 close of 2808.08, Yuihama said in an interview this week. Shares in the gauge trade at an average of 14 times forecast earnings per share. Valuations fell to 12.5 times in January, the lowest since January 2009, after the bankruptcy of Lehman Brothers Holdings Inc. in September 2008 roiled global financial markets.

“That’s too cheap, considering that corporate earnings are expected to grow 20 percent,” said Yuihama at Tokyo-based Daiwa, a unit of Japan’s second-largest brokerage by market value.“If the PE goes back to the historical average of around 20, theoretically, it won’t be difficult for the index to recover to over 4,000.”

The Shanghai index has fallen about 2.5 percent in the past year on concern actions by policy makers to cool inflation will slow growth in corporate earnings. The MSCI World Index of 24 developed markets has risen about 13 percent in the same period.

China’s consumer-price index accelerated to a 4.9 percent increase in January from the same month last year, exceeding the 2011 target for a fourth month. The government raised banks’ reserve requirement ratio for a second time this year on Feb. 18.

Economists surveyed by Bloomberg News expect prices rose 4.8 percent pace in February, according to the median of 22 estimates.

Earnings, Inflation

Ma Jiantang, head of China’s National Bureau of Statistics, said he’s “confident” of achieving the government’s 4 percent target for consumer price increases. Ma spoke while attending a meeting of the National People’s Congress in Beijing today.

Analysts expect earnings for the 932 companies in the Shanghai Composite Index to rise 36 percent to 212.79 yuan per share, according to data compiled by Bloomberg. The estimated price-to-earnings ratio will rise to 16 times and hover around that level for the next 9 months, Yuihama said.

“China’s stocks have dropped because of monetary tightening to control inflation,” Yuihama said. “However, the movement of the core CPI is moderate, so it’s not at a level investors should worry about.”

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