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China Stocks to Rally Until First Quarter 2013: Nomura

Chinese stocks could climb as much as 20 percent by the first quarter of 2013 after having bottomed in early June, and investors looking for a window to buy should dip in now, according to Japanese brokerage Nomura.

An investor smiles at a stock exchange hall on August 10, 2011 in Shenyang, Liaoning Province of China.
ChinaFotoPress | Getty Images
An investor smiles at a stock exchange hall on August 10, 2011 in Shenyang, Liaoning Province of China.

However, this will be a short-term bounce, Nomura warned, and the market could give up most of these gains after March. This is because inflationwill creep back up to 4 percent for much of 2013 and China will need to put up with slower growth in order to implement reforms, Research Analysts Wendy Liu and Vicky Fung said in a report published on Monday.

For now, traders looking for a short-term opportunity to buy will benefit from low valuations in the MSCI China Index, which is trading at close to 9 times current earnings, and an economy that is expected to bounce back from a government-engineered slowdown.

“Valuation on the MSCI-China has returned to levels seen during the global financial crisis,” the Nomura analysts said in the report. “More importantly, pro-stability policies in China are starting to show up in certain macro data. While China’s current macro data remain mixed such that many investors hesitate to make a definitive call, we believe that such data will continue to improve in the coming months.”

The MSCI China Index was trading at 52.22 as of July 23, according to latest weekly data from Datastream, Fung said. A slow-down in the economy had weighed on Chinese stocks for much of the year, with GDP growth decelerating to a three-year low of 7.6 percent in the second quarter.

Nomura believes that June was the turning point for both equities and the economy. China’s quarterly GDP growth should improve through the second quarter of 2013, Nomura said. The brokerage forecasts that the Chinese economy would expand 8.1 percent, 8.8 percent, 6 percent and 8.2 percent respectively in the four quarters of 2013.

However, this would also mean that inflation would return to 3 percent in the fourth quarter of 2012 and 4.2 percent for 2013, after hitting a trough of 2.2 percent in June, according to the analysts. A new central government in Beijing to be installed at the end of the year may also sacrifice growth for long-term stability and reforms.

“After a decade of relatively fast GDP growth, overcapacity in multiple sectors, and rising income and wealth gaps, such reshuffling of the economy is necessary,” Liu and Fung said. Beijing may set its 2013 GDP target at 7.5 percent, similar to 2012, they added.

For short-term trades, Nomura favors “tactical” stocks like Baidu, Cathay Pacific, CNOOC, Huaneng, Galaxy and ICBC, which are high beta stocks that it believes will rally until the first quarter of 2013, and may decline after.

The brokerage also recommends a list of so-called ‘core’ holdings, which investors should buy now and hold, including Geely, Want Want, China Life, Sino Biopharm, Zhaojin Mining, Beijing Enterprise and China Mobile. “We believe that these are the stocks worth accumulating on weakness,” Nomura said.

Nomura believes Chinese stocks could rise again in 2014. Despite moderating GDP growth, China will not experience too much social instability, and at some point in 2014, there should be early signs of reform success. For example, the central government would have already taken action by then to recapitalize state banks if needed.

- By CNBC's Jean Chua.