Get set for a liquidity rally - the DBS Vickers Securities Equities ...

Regional ETF Focus
Get set for a liquidity rally
Hong Kong / China (Overweight) (Joanne Goh, joannegohsc@dbs.com)
Near term outlook
The Chinese A-share market recovered from its low of 2477
to 2827 currently. We remain hopeful that the market has
passed its worst in terms of policy actions.
With inflation risks returning we believe that market will be
fixated on interest rates. China's 2Q GDP came in at 10.3%
YoY compared to 11.9% in 1Q. GDP in 1H10 grew by
11.1%. 3Q GDP is expected to be 9.5% The numbers
suggest that policies should remain status quo for now as
the economy returns to a more sustainable path. It won't be
necessary to introduce more fiscal stimulus measures or ease
the current monetary policy stance.
We believe that the tightening measures in China will be an
on-going process but the impact will gradually fade. The
rumoured RRR hike (which was temporary for two months
and restricted to six banks) , if true, also signals that more
tightening may be forthcoming. Indeed China raised rates
on 19 Oct as one of the first steps to stem inflationary
expectations. As complications arise from currency,
domestic demand, social and political pressure we believe
China will tread carefully along the tightening path.
Investors are generally less enthusiastic on the Chinese
market on two major concerns - the banking and the
property sectors because of the exceptional loan growth last
year. While this year's loan growth has normalized, the
lingering effect especially on loan quality and capital raising
requirements still haunt. We believe uncertainties will
remain, as there are doubts on the data quality emerging
out of these two sectors. In our view the promising demand
outlook in China and low valuations justify investors'
position in the banking sector.
However the China property sector should go through a
longer adjustment process as supply situation, sticky
housing prices, austerity measures, corporates' balance
sheet should continue to weigh on this sector.
We prefer direct beneficiaries of domestic demand like
retail, food and beverage, and industries, which
manufacture for China's domestic demand. Companies that
are strong in the inner cities should have stronger growths
going forward as economic activities began to shift inwards.
High wage pressures from the coastal regions and the near
completion of the railway transportation should justify the
economic sense.
The property and the banking sector in Hong Kong
meanwhile has a lot to cheer about. Despite the austerity
measures delivered by the government, property prices
continue to rise. We believe this is because of the recent
auctions of “prized” parcels of land in the Kowloon area,
which has never been available for a long time. Moreover
with abundant liquidity from Hong Kong and China as a
result of lower interest rates and cheaper HKD, we continue
to see asset price rise in Hong Kong.
The unemployment picture is also looking better. Hong
Kong is perceived as the “gateway” to China where
demand growth is strong. Moreover, Hong Kong is the only
place in the world where onshore CNY can be exchanged
into USD currently. We expect more overseas companies
from all sectors to set up offices in Hong Kong, hence
improving the employment outlook. (For details, please see
“HK: Hovering at an inflection point”, Chris Leung, 4Q
Economics-Markets-Strategy, 10 Sep 2010).
Meanwhile valuation for the HSI has risen to 13.3x, but still
below historical average of 14.4x. H-shares trade at 13.5x
above the historical mean.
Fig. 22: HSI 12-month forward PER
21
19
17
15
13
11
9
7
5
(x)
02 02 03 03 04 04 05 05 06 06 07 07 08 08 09 09 10 10
Source: Datastream, IBES
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