Templeton predicts 20% China stock rally as panic fades

[HONG KONG] The worst is over for Chinese stocks after panicked investors caused the world's deepest selloff, according to Franklin Templeton's money-management unit in Shanghai.

The US$5.3 trillion market will rebound as much as 20 per cent in the "short term" as economic growth picks up and yuan volatility decreases, said Lirong Xu, the chief investment officer at Franklin Templeton Sealand Fund Management Co, which oversees about 30 billion yuan (S$6.5 billion). He spoke less than two hours before the central bank cut lenders' reserve requirements, sparking a rally in China's offshore equity-index futures.

The money manager said he was buying shares on Monday as the Shanghai Composite Index tumbled as much as 4.6 per cent amid disappointment over a lack of specific measures to boost growth during the Group of 20 meetings in Shanghai. The gauge has dropped 24 per cent this year, the worst performance among 93 global equity indexes, on concern capital outflows will accelerate and earnings deteriorate as the economic slowdown deepens.

"People are overly panicky," Xu said in an interview in Hong Kong. "I am still quite bullish on the Chinese economy and the A-share markets on a one to three-year horizon. The economy will bottom out in the first half and the yuan will stabilize." The required reserve ratio will drop by 0.5 percentage points effective March 1, the People's Bank of China said on its website Monday, after Governor Zhou Xiaochuan on Friday highlighted scope for action if needed. The move adds orthodox easing to its recent efforts to guide market rates lower and injections of liquidity.

The Hang Seng China Enterprises Index futures rose 0.9 per cent as of 10:45 a.m. in New York, while the yuan dropped 0.1 per cent against the dollar in offshore trading.

The PBOC has been trying to restore stability to the nation's currency after outflows hit a record pace in recent months. Reductions to the required reserve ratio - which will allow banks to lend more - help compensate for the departure of money.

Xu said he's been buying commodity producers as well as so- called new economy companies in industries including education, sports entertainment and movie production. His Franklin Sealand China Prospect Mixed Assets Fund is down 2 per cent in the past 12 months, compared with a 19 per cent drop by the Shanghai gauge.

"It's time to buy," Xu said. "You start to buy when people begin to panic."

BLOOMBERG