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'Major' Rally for China Stocks Before Mid-Year: Expert 

Ansuya Harjani|CNBC Asia Pacific
Sunday, 23 Jan 2011 | 1:27 AM ET

China's economy powered ahead in 2010, but the performance of its stock market far from impressed global investors.

Last year, the benchmark Shanghai Composite Index declined over 14 percent, gaining the unfortunate title of Asia's laggard market, as worries about economic overheating and regulatory uncertainty limited gains for Chinese equities.

However, market watchers are expecting a strong turnaround in the fortunes of mainland stocks this year.

Aadil Ibrahim, managing director of Bowen Capital, notes that when China's inflation cycle peaks, which he forecasts will occur before mid-year, the market will experience a "major" rally.

"Our view is we're only probably a few months away from when [inflation] peaks, and this is the time to start building positions, because when it peaks you will see a market rally and it's too late by then," he elaborated.

When consumer inflation begins to moderate and fall, Mingchun Sun, managing director and chief Greater China economist at Daiwa Securities Group, explains that concerns over price pressures and aggressive policy tightening will begin to fade, hence restoring confidence to the market.

"Falling inflation and slightly below-trend GDP growth gives policy makers a window of opportunity to focus on the economy's structural transformation and quality of economic growth," he continued. Sun forecasts China's GDP will taper off to 9.6% in 2011, from 10.3% last year.

Jerry Lou, China strategist at Morgan Stanley, agrees adding that a more balanced growth environment will lead to more continuity and predictability in China's economic policy.

"I'm expecting the market to respond positively to the decelerating economy because the tightening will be less, there will be more transparency, more continuity in the policies," he noted. "When you get a slower economy, I think you could very well have a re-rating of the market," Lou concluded.

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