China’s stocks are set to climb 36 percent over the next year as valuations drop below their decade average and the government further loosens monetary policy to bolster economic growth, according to Credit Suisse Group AG.
The benchmark Shanghai Composite Index is likely to rise to 3,100 by the end of June 2013, Vincent Chan, head of China research at Switzerland’s second-largest bank, said in an interview at a conference on June 7 in the eastern city of Hangzhou. He previously forecast the index would reach that target by the end of this year, according to a March prediction. The measure fell 0.4 percent to 2,284.03 at 2:33 p.m. today.
Chan, whose company is the third-ranked brokerage for China equity research in Institutional Investor magazine’s 2012 annual poll, said he likes consumer, brokerage, insurance and technology companies over a three- to five-year period. China’s central bank yesterday announced a cut in interest rates for the first time since 2008.
“The government will do something including stepping up infrastructure projects and cutting reserve-requirement ratios or interest rates,” he said.
Companies on the Shanghai Composite currently trade at 1.74 times book value, compared with the average of 2.38 times for the multiple since 2003, Chan said. The gauge has advanced 4.2 percent this year on expectations the central bank will lower interest rates to halt a decline in economic growth.
Deutsche Bank AG’s head of Asian equity strategy, Ajay Kapur, said June 5 that he likes China’s yuan-denominated shares because of cheap valuations and the prospect of economic stimulus. Beijing Gao Hua Securities Co., Goldman Sachs Group Inc.’s partner in China, said May 30 the Shanghai Composite is poised to rise to 2,750 by the end of this year.
The People’s Bank of China lowered rates before the release of May economic data this weekend that may show fixed-asset investment expanded at the slowest pace in a decade and industrial output grew less than 10 percent for a second month.
China’s economy, the world’s second largest, grew 8.1 percent in the first quarter, the slowest pace in almost three years. To boost growth, the government has allocated 26.5 billion yuan ($4.2 billion) to subsidize purchases of energy-saving household appliances and accelerated approvals of railway projects.
Chan predicted China will cut the reserve-requirement ratio between 0.5 and 1 percentage point this year. The central bank has lowered the ratio three times since November. He estimated profits for Chinese listed companies may grow as much as 5 percent in 2012. Earnings for Shanghai Composite-listed companies grew 14 percent in 2011, according to data compiled by Bloomberg.
Stocks in the Shanghai index are valued at 9.9 times estimated profit, according to weekly data compiled by Bloomberg. A 33 percent decline in the gauge over the two years ended 2011 sent the multiple to a record low of 8.9 times in January.
“Given the current index’s level, there’s not a big possibility that it will drop further,” Chan said.