Chinese stock market in the Year of the Pig

Christian Deseglise, Global Head of Emerging Markets Business at HSBC Investments, which manages US$329 billion of assets worldwide, of which US$62 billion is in emerging markets assets, believes the outlook for China continues to be favourable, with valuations supported by a strong macroeconomic environment and robust earnings growth.

Deseglise said: “2006 was an exceptional year for China, with the equity market rising 83% in dollar terms for the year, outperforming its BRIC (the collective term for Brazil, Russia, India and China) counterparts and nearly all other emerging markets.

Despite this impressive past performance, China remains attractive going into the New Year. On the economic front, China has recently seen its fourth straight year of double digit GDP growth. While the Government has introduced measures to cool certain sectors, the Chinese economy is still on track for growth of around 9% in 2007, HSBC Investments believes.

Other positives in the previous year include US$63 billion in Foreign Direct Investment (FDI) for 2006, retail sales increasing at a vigorous pace and a 27.2% annual rise in exports.

This, according to Deseglise, provides the foundation upon which China is set to build in 2007.

He said: “Healthy fund inflows are likely on the back of an expectation of further Renminbi appreciation and substantial tax savings; a consequence of the government’s corporate tax reform. The completion of the A-share reforms will reduce barriers to mergers and acquisitions, unlocking company value, whilst the Beijing Olympics in 2008 should provide a further boost to market sentiment.”

Deseglise also sees good promise from China’s stock market going forward.

He added: “Despite last year’s rally, Chinese valuations are supported by corporate earnings that are expected to remain robust in 2007. Recent market strength and the prospects of a heavy IPO calendar may, however, trigger some short-term profit taking. That said, over the mid-term, we believe that China will continue to perform well.”

Richard Wong, Investment Director at Halbis in Hong Kong, and manager of the US$5.1 billion HSBC GIF Chinese Equity Fund, is similarly optimistic for the long term outlook of the China market.

He added: “Recently released macro data and leading indicators such as fixed-asset investment, consumption growth rates and the credit/money supply suggest that China’s economic growth will remain healthy in 2007. Stocks with low interest rate sensitivity and solid bottom line growth will be on the top of our recommendation list. We continue to overweight the consumer, transportation (airports and railways) auto and parts, energy and chemical sectors.”