Don't Fight The PBoC, CLSA Sees 17% Upside In 2015 -- Barron's Blog
DOW JONES & COMPANY, INC. 1:26 AM ET 12/15/14
Symbol Last Price Change BABA 105.11 0 (0%) GWLLF 5.146 0 (0%) JD 23.97 0 (0%) MCHI 48.14 0 (0%) QUOTES AS OF 04:00:20 PM ET 12/12/2014
Don't fight the Fed. We all know the Federal Reserve Bank in the U.S. is a powerful institute.
The same logic goes with the People's Bank of China, according to CLSA's equity strategist Francis Cheung, who made a bullish call on China today.
Sagging domestic demand and lower energy prices have brought consumer price inflation in China down to 1.4% in November. China's central bank will have to cut interest rates further to "offset deflationary forces from property market and overcapacity, especially if inflation target is maintained at 3.5%," argued the Asia-based brokerage. CLSA expects at least one to two more interest rates cuts totaling 50-60 basis points as well as two cuts on the reserve requirement ratios to the tune of 1 percentage point (from 20%).
History should repeat itself. In the last two monetary easing cycles in 2008 and 2012, China's equity markets rallied. CLSA also expects stimulus packages coming from Beijing. The two key points from China's annual policy meeting last week were the new norm - which means Beijing is likely to target a lower growth rate - and stable growth, i.e., fiscal stimulus, said Cheung at the media briefing today. A proper stock market rally requires easing from both the fiscal and the monetary side.
According to CLSA, "2015 will be a better year due to lower risk premium and 2016 could be the year of reaping reform benefits." What that means is that we are likely to see more re-rating - or multiple expansions - than earnings growth in 2015. The broker now sees a total return 17% for MSCI China (13% upside to their index target plus a 4% yield), 11% for MSCI Hong Kong, 16% fo r Hang Seng China Enterprises Index and 16% for the Hang Seng Index.
To be sure, Cheung sees some pull-back in the near-term. He made two arguments. First, China's manufacturing PMI is a good leading indicator of stock market performance. With the official PMI just slightly above 50 in November and December PMI possibly dipping below 50 on seasonality, we may see pull-backs towards year-end. Second, the recent bull rally in China's A-Share market may have delayed PBoC's decision to further easing.
CLSA's top picks for 2015 are e-commerce Alibaba Group(BABA) , Internet search engine Baidu ( BIDU), railway and road construction firm China Communications Construction Corp. ( 1800.HK), Macau casino Galaxy Entertainment ( 0027.HK), car manufacturer Great Wall Motor(GWLLF) ( 2333.HK), power generator Huadian Fuxin ( 0816.HK), direct sales e-commerce JD.com(JD) ( JD), Hong Kong telecom PCCW ( 0008.HK), insurance company Ping An ( 2318.HK), sportswear manufacturer Shenzhou International ( 2313.HK) and China's largest property developer China Vanke ( 2202.HK).
At the media briefing, Cheung briefly discussed Macau. China's anti-corruption drive is not likely to be worse next year, but Cheung believes 2016 may be a better year to get into the Macau stocks.
Over the weekend, in my column " Bullish on China's Banks", I essentially argued the same thing: Chinese banks are the most direct beta plays to the PBoC's further easing next year. Don't fight the PBoC.
Year-to-date, the iShares China Large Cap ETF ( FXI) rose 4.5%, the iShares MSCI China ETF(MCHI) gained 1.3% and the DB X-trackers Harvest CSI 300 China A-Shares Fund ( ASHR) rallied 35.6%.
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