Bullish outlook on equities

International investors confident despite China's cyclical GDP growth

International investors are bullish on China equities, with their optimism fueled by the repeated emphasis from new Party chief Xi Jinping and Vice-Premier Li Keqiang on the need for reforms, coupled with receding market concerns of an economic "hard landing" in China, a senior executive at Goldman Sachs said.

Speaking at a news conference in Hong Kong on Wednesday, Helen Zhu, managing director of global economics, commodities & strategy research, global investment research at Goldman Sachs (Asia), said international investors she has spoken to over the past two weeks are quite positive that equities will have healthy earnings growth despite the country's cyclical GDP growth.

"More pro-growth policies like a bigger fiscal budget and more fixed-asset investments are already anticipated by investors," Zhu said, adding that they are also interested in fund flows of emerging markets.

Turning to Asian investors, Zhu said they are not as bullish as other international investors over China stocks, but they are starting to "warm up".

In December, Asian investors reflected mixed responses, but were more postive than in previous months, she said.

China, she said, is entering a new era of equities, and investors are keeping an eye on the annual sessions of the country's legislative and political advisory bodies in March, which are expected to focus on the country's GDP and inflation targets in 2013.

Goldman Sachs predicts that the GDP target will be about 7.5 percent, and the inflation target will be 3.5 percent.

"Investors will also keep an eye on the introduction of new ministers as several current ministers have reached retirement age," Zhu said. Once the new lineup is confirmed, investors will interpret the moves and decide on their investment strategies and long-term agendas.

Regarding the further upside potential of equities, Zhu said that hinges on the global environment, liquidity and the reform progress.

Since Nov 30, China offshore equities have had a strong run, with the Hang Seng China Enterprises Index up 11 percent. Goldman Sachs sees three major drivers to China equities: the China macro scene mainly driving earnings; the global macro scene and liquidity affecting valuation more directly; and the reform outlook driving valuations.

Regarding China reforms, Zhu said it is still too early and difficult to gauge the potential pace of reform. "Nonetheless, given very low expectations on this front, we think the room for upside surprise outweighs that for more disappointment."

If reports circulating widely in the media regarding potential policy advancement on issues like hukou reform, price deregulation and tax reforms lead to concrete new policy announcements in the first quarter of 2013, that should boost confidence, Zhu said.

Timothy Moe, chief Asia Pacific strategist at Goldman Sachs, said: "Following stronger-than-expected production data in October and November, we have raised our fourth-quarter 2012 GDP forecast for China to 7.8 percent from 7.6 percent, bringing full-year growth in 2012 to 7.7 percent.

"This higher base also leads to a modest increase in our 2013 GDP growth estimate to 8.2 percent from 8.1 percent, and we expect a further moderate improvement to 8.4 percent in 2014," he said.

Furthermore, the Central Economic Work Conference in late December sent encouraging policy signals, notably in positive statements regarding infrastructure investment and liquidity, as well as in reinforcing the key policy themes of urbanization and structural form.

"Although these are just incremental changes, they increase our confidence in a cyclical economic upturn in 2013 and 2014 after the sharp fall in 2012 from 2011's 9.3 percent growth," the chief strategist said.

joonsan@chinadailyhk.com

(China Daily 02/07/2013 page13)