Risk aversion high, but China market to improve in late Q4

Valuations for China and Hong Kong shares are cheap but investors will remain cautious on global concerns until late Q4, said Francis Cheung, CLSA managing director of China-Hong Kong strategy.

Speaking during the brokerage’s investors’ forum in Hong Kong this week Cheung said: “Much negativity has priced in with risk aversion near all-time high at dotcom, SARS and the global financial crisis levels, no one will commit unless the market gets stable.”

Instead of looking at the actual loosening of policy, which may boost the market performance, Cheung said investors should also focus on the government’s ability to adopt such a policy.

“The world is cautious and there are still potential earning downgrades, the next infection point will come when inflation gets back to the government target level of 4%-5%, at such point market conditions may improve.”

Provided a high base of price level in the second half of last year, Cheung believes the country’s consumer price index (CPI) will possibly reach the target level in late Q4, and GDP will grow at a pace of 8% to 9% next five years. He also estimates the Hang Seng Index wll climb up to11x to 12x earning from the current 10x, which represents a 24%-25% upside.

In accordance to the recent debates on currencies, Cheung bets Hong Kong will sustain the US dollar peg, “Hong Kong has gone through a lot of bad times with the pegging system for decades, and no one would want to change a thing that works so long.”

Andy Rothman, the group’s China macro strategist, also added the yuan would appreciate at a slower pace of 3%-4% as net export is declining. He emphasises full convertibility of yuan is still unforeseeable in the near future as this is not the objective of the central government.


This article first appeared on Professional Adviser Hong Kong.

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