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China Rate Tightening Near End, Stocks to Rise: Strategist

China on Tuesday hiked the required reserve ratio for banks by 50 basis points (bps)after consumer prices rose more than expected in the month of May. But JPMorgan said it expects inflation to peak in the coming months, and for China's rate tightening cycle to end soon.

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Speaking to CNBC on Tuesday before the central bank's latest action, Geoff Lewis, Head of Investment Services at JPMorgan said China would hike interest rates just once or twice more, as inflation peaks at 6.5 percent in the coming months.

"This is the last lap of the race I think, unless we do get some adverse shocks that could always happen of course, but it's not our central scenario," Lewis said. "I think the main thing to ask as investors is that surely we are closer to the end of this tightening cycle than we are to the beginning."

JPMorgan, expects China's economy to experience a soft-landing, a scenario which would boost equities, according to the bank. The firm is forecasting gross domestic product (GDP) growth to slow from the current 9 percent per year to 7 percent.

"Equity investors should not blindly fear a slowdown of this nature as it could actually be a boon for the share prices of mainland companies," the bank said in a report. "When a steadier, slower growth trend takes hold, the need for a disruptive "stop-go" economic policy will evaporate."

China's runaway growth has been contributing to the underperformance of the Chinese stock market, according to the bank. "Repeated policy tightening episodes, as authorities turn on and off the brakes, have contributed to a high level of volatility in the domestic A-share market."

Further, a moderate slowdown would likely point to a shift away from investment and state-owned dominance and towards consumption and private enterprise, the bank said.

JPMorgan's Lewis told CNBC he was bullish on the country's services sector, especially financial firms. He pointed to the increased penetration by insurance companies in China's top tier cities. He's also bullish on the country's internet space, with internet penetration rates currently at around 25 percent of the total population. Click here for more.

"Certainly there are going to be the the Chinese equivalents of Google, that's absolutely defintite," Lewis said, while advising investors to do their homework and be stock selective. "This is a chance to buy into quality growth stocks so I would recommend taking a rather medium to long-term horizon."

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