This week, Goldman Sachs joined banks including JP Morgan in lowering their outlook for China’s growth, but HSBC says the recent trend of softening commodity prices could actually help boost mainland equities by 20 percent in the second-half.
The bank forecasts commodity prices could fall by another 5-10 percent in the near-term, helping to soften the blow of China’s tightening policies.
“Some are overlooking the fact that commodity prices have corrected moderately, ranging from industrial metals to agriculture products and crude oil, particularly since May,” HSBC said in a report published on Wednesday.
The lender maintained its year-end target for Hong Kong’s Hang Seng Index at 26,000 and Shanghai Composite at 3,300 from the current levels of 22,912 and 2,764 respectively, indicating a 13-20 percent upside for the indexes.
The correction in the commodity market is likely to benefit margins of midstream cyclicals and downstream consumer stocks, the report stated, adding that investors should increase their exposure to these sectors. Midstream cyclicals refers to companies such as oil and natural gas refiners, which are heavily exposed to increases in commodity prices.
HSBC also recommends buying mainland financial stocks, which have outperformed the China MSCI index in the past quarter.
Contrary to Standard & Poor’s, whichissued a report on Wednesday warning that Beijing’s policy tightening measures would weaken the profitability of China banks, HSBC says the government will shift away from tightening monetary policy towards a "more balanced approach" and that would help the financials.
"As growth tempers the pro-growth camp should have an upper hand against the inflation camp," adds Steven Sun, head of China Equity Strategy at the bank.
HSBC economists forecast just one 25 basis point interest rate hike and a 100 basis point increase in the reserve requirement ratio in 2011.
The recent softening in interbank rates is also proof that liquidity conditions in the mainland are improving, says Sun. The seven-day repurchase rate, which measures interbank lending, fell 24 basis points from the highest level in three months to 5.08 percent on Thursday.