"Monetary policy in China is working exactly as it should — by boosting property prices (a USD 22 trillion market, accounting for 57 percent of Chinese household wealth)," he said in the report. "Imposing negative real deposit rates of -0.8 percent on China's savers to financially repress them makes sense given China's 250 percent nonfinancial sector debt to GDP. Don't fight this."
The average new home price in 70 major Chinese cities rose 4.9 percent in March from a year ago, after climbing 4.6 percent in February, according to Reuters calculations based on data released by the National Bureau of Statistics on Monday. Although fears of overheating in some cities have prompted fresh rules for buyers, the overall rise in prices extends the recovery in China's housing market from its bottom last year.
Outside of China, Kapur recommends overweight exposure in Taiwan, Australia, Indonesia, Russia, Turkey and Chile.
"Growth/defensives sectors — The staples, Health care, Utilities, Telecoms, Internet/software sub-(SHUT-I) sectors have outperformed cyclicals by 35 percent in EMs since 2011 as the USD strengthened and inflation fell," he said in the note. "Time to reverse this. Buy EMs/Asia ex-Japan cyclicals/value and sell SHUT-I."
In addition to Chinese monetary policy, other factors Kapur cites for turning bullish on the region include:
- Cheap share valuation — Asian price to sales relative to the world is in the 17th cheapest percentile since 1995; EM is in the 19th.
- Historically low positioning among fund managers — EM is 1.1 standard deviations below the average exposure, according to BofAML's April fund managers survey.
- Stabilization in the U.S. dollar and greater competitiveness in Asia/EM currencies — 40 percent of the 23 markets fell to their most competitive quartile this year.
- Recovery in Asian/EM earnings — A larger U.S. current account deficit, more competitive Asia/EM currencies and more controlled capital expenditures will help boost profit margins in the Asia/EM region.
- Pressure for reform in state-owned enterprises will increase efficiency and margins.
"If they (Chinese authorities) muddle through these well-known 'structural' issues, while maintaining an easy policy that massages the tough transition to a services-driven, slower economy, we think the tail risks would be overestimated," Kapur said.
In its most aggressive easing policy since the global financial crisis, the People's Bank of China has cut interest rates six times since late 2014 and reduced the reserve requirement five times.
To be sure, the direct connection between Chinese monetary policy, the property market and equity performance remains unclear.
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Real estate companies make up just 5 percent of total A-share market capitalization, according to Wind Information.
In addition, Clem Miller, portfolio manager at Wilmington Trust Investment Advisors, said real estate stocks have actually been a detractor from equity returns so far this year.
"So, I wouldn't agree that monetary policy has gained traction. It might still do so, but it hasn't begun to yet," he said in an email, noting the major equity contributors year to date have been firms in oil and gas, and the internet sector.