Chinese equities to rally 20% on stimulus

[BEIJING] Chinese stocks will rally as much as 20 per cent this year as the government increases monetary stimulus and reforms state-owned enterprises, according to the money- management unit of China's second-largest insurer.

Corporate earnings will climb in the second half as authorities cut interest rates and encourage SOEs to expand overseas, said Brian Ingram, the chief investment officer at Ping An Insurance (Group) Co and Russell Investments Ltd's China joint venture. The central bank will add to this month's reduction in lenders' reserve requirements after January data showed declines in exports and manufacturing, he said.

"We wouldn't be surprised if there is still a 20-per cent- plus upside from where we left off last year," Mr Ingram, the CIO at Ping An Russell Investment Management (Shanghai) Co, which overseas US$1.4 billion, said in a Feb 9 interview in Shanghai. "The more primary driver in the second half is going to be corporate earnings." The Shanghai Composite Index has fallen 7.1 per cent from a five-year high on Jan 26 after regulators tightened rules on margin trading and data showed growth in the world's second- largest economy is weakening. The measure surged 53 per cent last year, the most among global benchmark indexes, as a stock trading link with Hong Kong started and the central back lowered borrowing costs for the first time in two years.

Mr Ingram's bullish view contrasts with more pessimistic forecasts from global banks including JPMorgan Chase & Co, which downgraded Chinese stocks this week on concern monetary stimulus is losing its potency as a driver of equity gains.

The recent slump in equities coincided with lower trading volumes, indicating traders are waiting until after the China's Lunar New Year holidays to resume purchases, Mr Ingram said. The weeklong festival starts on Feb 18.

China will also hold its annual National People's Congress and political consultative conference in the first two weeks of March, when the government sets its growth target for the year.

"It's not a surprise that investors will take profits, and wait until after we get more news from the Congress meeting in March to determine how they want to position themselves going forward in 2015," Mr Ingram said.

He favors Chinese infrastructure stocks, saying they will benefit from goverment measures to improve the profitability of state firms, declining to name any. Earnings will improve as SOEs expand abroad and a weaker yuan boosts export earnings, said Ingram, who graduated from Yale University and worked as a research analyst for Russell Investments, according to his LinkedIn profile.

Shanghai Composite companies are projected to boost earnings by 28 per cent over the next 12 months, according to analyst estimates compiled by Bloomberg. That compares with 5 per cent for the MSCI Emerging Markets Index.

BLOOMBERG