China H-Shares to Soar 33% by Year-End, Deutsche Bank Says

  • Brokerage favors financial, tech, industrial, utility stocks
  • Fiscal stimulus on mainland to boost economic growth

Chinese stocks trading in Hong Kong will surge 33 percent by the end of this year as stronger fiscal stimulus on the mainland revives economic growth, Deutsche Bank AG said.

The Hang Seng China Enterprises Index will climb to 13,000 before the end of 2015, Hong Kong-based strategists Yuliang Chang and Joseph Huo wrote in a report. China Construction Bank Corp. and Ping An Insurance Group Co., firms with earnings closely tied to the capital markets, were listed among the bank’s top picks. The gauge of so-called H shares closed at 9,780.16 on Thursday and fell 0.6 percent on Friday.

“We remain upbeat,” the strategists wrote in the report dated Thursday. “We prefer H shares to position for macro improvement ahead.”

The Hang Seng China Enterprises measure has rebounded 6 percent this week, its biggest advance in five months, after Chinese officials said markets would stabilize in the coming weeks and speculation grew that the government will step up stimulus to revive a slowing economy. The gauge was 34 percent below its May peak on Thursday, leaving valuations cheaper than any other market in Asia, as a boom by mainland equities turned to bust.

The H-share gauge trades at 7.1 times reported earnings, 22 percent below its five-year average, according to data compiled by Bloomberg. The MSCI Emerging Markets Index trades at 11.9 times.

The Deutsche Bank analysts said they favored financial, technology, utility and industrial companies. They are shunning telecommunications shares and energy firms.

Fiscal Stimulus

China will speed up construction of some major projects and step up efforts to remove fees and reduce tax burden on companies, the finance ministry said this week. Fiscal stimulus will play a larger role in boosting growth in the second half of 2015, Nomura Global Markets Research analysts wrote in a report dated Wednesday.

The central bank has cut interest rates five times since November and lowered the proportion of deposits banks have to set aside as reserves in a bid to cushion the economy’s slowdown. Premier Li Keqiang this week sought to soothe concerns over the growth outlook, saying the economy was operating in a reasonable range even as it faces downward pressure. China’s official factory gauge fell to the lowest reading in three years last month and exports dropped.

For all the losses in Chinese stocks since the nation’s record bull market ended in June, shares in Hong Kong are still half the price of their identical counterparts on the mainland. Dual-listed companies trade at an average 109 percent premium in China, while the Hang Seng China AH Premium Index, which gives a bigger weight to larger companies, shows the mainland market was 33 percent more expensive.

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