Chinese stocks will probably rally as much as 20 percent as gauges of economic growth stabilize and valuations rise from historic lows, JPMorgan Chase & Co. said.
“We recommend a trading buy of China equities, based on seasonality and all-time low valuations,” Michael Yu, a strategist at JPMorgan in Hong Kong, wrote in a report dated yesterday. “We expect a 15-20% market rebound in the coming weeks, once growth stabilizes due to seasonality and the market’s focus switches to structural reforms.”
The Hang Seng China Enterprises Index has dropped 9.1 percent this year, sending its valuation to a 32 percent discount versus the five-year average, as an official manufacturing index for January signaled a slowdown in the world’s second-largest economy. The purchasing managers’ index tends to show higher readings in March and April, Yu wrote.
Improving economic data may spur investors to focus on policies that emerge from the National People’s Congress scheduled for next month, according to Yu. The ruling Communist Party unveiled its biggest package of economic reforms since the 1990s in November, including more private investment in state-controlled industries and a looser one-child policy.
China’s growth will have “huge consequences” for the global economy, Goldman Sachs Group Inc. Chief Executive Officer Lloyd C. Blankfein said in an interview with Bloomberg Television’s John Dawson from Hong Kong today.
The JPMorgan strategist recommended stocks related to health-care, clean energy and environmental protection that may benefit from economic reforms. He said Chinese banks will get a boost from low valuations, large dividends and high return on equity.
The Hang Seng China index jumped 2.6 percent at 11:59 a.m. in Hong Kong, heading for its biggest gain since Nov. 18 and extending its rally from a six-month low on Feb. 5 to 4 percent. The gauge is still this year’s worst performer among equity indexes in emerging and developed markets tracked by Bloomberg.
The Shanghai Composite Index of mainland-traded shares rose 0.4 percent. Financial companies led today’s rally, with Ping An Insurance (Group) Co. climbing 4.5 percent in Hong Kong. JPMorgan’s top picks include Ping An, Sino Biopharmaceutical Ltd. and Tencent Holdings Ltd.
The Hang Seng gauge is valued at 6.5 times estimated earnings for the next 12 months, versus the five-year average of 9.6, according to data compiled by Bloomberg.
China’s official PMI for January dropped to a six-month low of 50.5 as output and orders slowed amid government efforts to rein in excessive credit. A separate PMI report compiled by HSBC Holdings Plc signaled the first contraction in six months.
The central bank may announce new lending and money supply figures as early as today. Foreign trade data are due tomorrow and inflation figures on Feb. 14.