By Chris Oliver , MarketWatch
HONG KONG (MarketWatch) — China stocks could be bright spots in coming weeks and months, according to analysts, who say strong earnings momentum and a potential peaking of inflationary pressures bode well for the outlook. HSBC Holdings joined other big brokerages in upgrading China on Thursday, saying the view was its first positive one on the mainland market since the second quarter of 2010.
Data that showed lending by Chinese banks fell 25% in January to February from the year-earlier period pointed to a cooling in the credit cycle, HSBC said. Money supply was also showing signs of easing, with M2 expanding 15.7% in February, compared with February 2010, on track with the People’s Bank of China’s 16% target.
“Monetary tightening is working and should increase the odds of a soft landing,” wrote HSBC strategists in a quarterly research report on the region.
HSBC said inflation should peak in June, with the CPI reading at 5.5% to 6%. That view was backed by recent surveys of Chinese manufacturing which showed wholesale inflation beginning to flatten in March from the levels of February, HSBC said.
The PBOC was likely to tighten in one additional quarter-point move this year, capping off a tightening cycle that began in October.
Citgroup underscored its upbeat view, urging investors Thursday to buy China stocks, including machinery makers that appear set to benefit as wage inflation fosters automation.
Citi added that China could pause in its policy tightening later this year, becoming the first of several economies in Asia to exit the rate-hike cycle.
It noted that recent policy tightening, including a surprise quarter-point move Tuesday, had brought China’s interest rates closer to neutral. “China is trading Cheap compared to both its history and valuations in the region,” Citi’s Hong Kong–based analysts said in a report dated April 6.
Meanwhile, Credit Suisse joined the chorus of upbeat voices, saying key indexes of China stocks could rally by as much as 25% in the coming year.
On average, profits for the approximately 1,400 mainland Chinese companies that had reported results by the end of March were up 38%, while sales were 34% higher, the research showed.
Credit Suisse said it had amended its previous outlook in favor of a more optimistic view, lifting its target on three key China stock indexes. Read more about Credit Suisse’s outlook for China.
Also Thursday, Goldman Sachs upgraded its China equity stance to overweight from market weight, saying it favored mainland banks and property stocks.
The brokerage said recent inflation and macroeconomic activity suggested that the nation’s policy tightening “is beginning to bite,” which in turn has led its economists to expect less further tightening.
Chris Oliver is MarketWatch's Asia bureau chief, based in Hong Kong.