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China Stocks May Rebound Over Next Two Months, JPMorgan Says

Chinese stocks may be poised for a rebound over the next one-to-two months as the economic recovery picks up in the third quarter, according to JPMorgan Chase & Co.

Companies that benefit from fixed-asset investment will likely lead the recovery, JPMorgan analysts led by Frank Li wrote in a report today. They favor Changsha Zoomlion Heavy Industry Science & Technology Development Co., Weichai Power Co., China National Building Material Co. and Anhui Conch Cement Co., according to the report. The economy may grow more than 8.5 percent in the third quarter from 7.8 percent in the previous three months, they said.

“The China market might have reached the maximum stress point,” the JPMorgan analysts said. “China’s sequential economic growth appears to have troughed in the second quarter.”

Goldman Sachs Group Inc. also predicted a “short-term” rebound for Chinese stocks, according to a July 1 report from analysts led by Hanfeng Wang. Standard Chartered Plc said yesterday investors should be “overweight” Chinese equities in the next three months as the government achieves a “soft-landing” for the economy. Nomura Holdings Inc. said yesterday the nation’s stocks will offer “buying opportunities” in the second half.

The MSCI China index rose 2.3 percent yesterday, erasing this year’s loss, on speculation the central bank will refrain from adding to four interest-rate increase since early 2010 as services and manufacturing reports signaled slower growth.

Real Interest Rates

The stock gauge has climbed 1.6 percent in 2011 through yesterday, compared with a 1.6 percent gain by MSCI’s gauge of emerging-market companies and a 0.2 percent rise by the Shanghai Composite Index.

JPMorgan maintained its "medium-term view" that Chinese shares may not stage a “sustainable rally” until after so-called real interest rates move into positive territory, the analysts said in the report. The magnitude of the expected short-term stock rebound will depend on quickly consumer-price gains slow in the second half of the year after an expected peaking in June and July, the analysts wrote.

The inflation rate, which jumped to a 34-month high of 5.5 percent in May, may surge to 6.5 percent in June, spurring the central bank to raise interest rates for the first time since April, Shenyin & Wanguo Securities Co. said in a June 30 report.

Monetary Policy Concern

Chinese inflation running beyond the government’s target could keep stocks “flat at the current level” for the next two months, amid concerns over further measures to tighten monetary policy, according to Morgan Stanley.

“The MSCI China index has never performed well when expectations are for high inflation, or CPI higher than 4 percent,” Allen Gui, a Shanghai-based analyst at Morgan Stanley, said last week in an interview. “The market sentiment will remain weak in the coming two months, as high inflation is always followed by cooling measures.”

China is likely to raise rates this weekend after the central bank said yesterday inflationary pressure remains high, the Economic Information Daily reported today, without citing anyone. Consumer-price increases may hit 6.2 percent in June, the report said, citing market estimates.

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