In anticipation of an encouraging outloook in the medium term, three sectors are expected to perform — consumer, financial and property, according to UOB Kay Hian (Hong Kong) Research analyst Elvic Ng.
Ng foresees private sector investment and consumer spending gaining momentum in the second half of 2009 and contributing to the economic recovery in China.
In a note, Ng wrote that corporate earnings downgrades in China had been reversed in April this year, and an upward revision could be expected for financials in the banking, coal, metal and property sectors there.
“We believe China stocks are still in an early stage of a new multi-year bull market because of a steady consumption-driven economic expansion in the medium term, low interest rates, abundant domestic liquidity, and declining risk premium.
“Those who are long-term bullish should focus on consumer, financial and property stocks,” Ng said.
Consumer product companies are expected to benefit from policymakers’ intention to boost domestic consumption from 49% of gross domestic product (GDP) to some 80% by 2020. At the same time, an expanding distribution channel in the form of retail outlets is anticipated to enhance the sale of consumer products.
Within the financial services industry, it is worth noting that China’s life insurance market has a low penetration rate of 1.8%, compared with 9.6% in Japan, 11.8% in both South Korea and Hong Kong, and 15.7% in Taiwan.
Meanwhile, banks in China are expected to see an expansion in retail activities and fee-based income operations like investment banking and wealth management over the next few years as the economy continues to grow.
Real estate is another sector to watch as rapidly increasing personal wealth and urbanisation prompt demand for houses.
The research firms’ top five medium- and long-term picks include China Life Insurance Co Ltd, China Merchant Banks, China Overseas Land & Investment Ltd, Hengan International Group Co Ltd, and Hong Kong Exchanges and Clearing Ltd.
Meanwhile, CLSA Asia-Pacific Markets analyst Francis Cheung said while China posted an impressive 7.9% annual expansion in its GDP for the second quarter of this year, a notable concern is that the growth was spurred mainly by investment rather than domestic consumption.
“The weak consumption growth explains why the government has repeatedly stated that the economy is still not stable and monetary policy will remain ‘moderately loose’. Loose monetary policy will continue to fuel asset inflation and the stock market.
“The economy is not as strong as the headline numbers report and the government will likely err on the side of safety. An investment-driven recovery is not sustainable unless private consumption also increases,” Cheung wrote in a note.
CLSA foresees a major improvement in the soon-to-be-announced second-quarter earnings, particularly in sectors which are deemed beneficiaries of the government’s stimulus package. These include the automotive, property, construction and consumer product sectors.
However, the telecommunications, steel and banking industries could see pressure on their profit margins, according to the research firm, whose list of potential performers include Angang Steel Co Ltd, China Shenhua Energy Co Ltd, Dongfeng Motor Co Ltd, Jiangxi Copper Co Ltd and Shanda Interactive Entertainment Ltd.
By The EDGE Malaysia (by Chong Jin Hun)
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