Chinese Stocks Likely to Surge Up to 80%: RBS

Hedge funds and local investors have been getting increasingly pessimistic about Greater China stocks, with the short interest on the Hang Seng Index now near a one year high. But The Royal Bank of Scotland (RBS) is taking a contrarian view, saying it believes the MSCI-China Index could see a 40-80 percent upside through 2012.

A local investor watches the share-prices index display at a stock brokerage in Shanghai.
Liu Jin | AFP | Getty Images
A local investor watches the share-prices index display at a stock brokerage in Shanghai.

The bank joins a growing chorus of bullish voices, who argue that Chinese stocks are cheap based on historical valuations and now is the time to buy. HSBC is already calling for a 20 percent upside to Shanghai stocks and last week, money manager Yang Liu told CNBC she had gone from shorting Hong Kong stocks to betting on a rebound.

In its strategy report, RBS says an accommodative U.S. monetary policy and Chinese macro policy will help the MSCI China index log a PE of 18.2x earnings next year, a sharp increase from the current year’s PE of 11.4x.

RBS also believes the rising participation of the private sector in social housing will help support fixed asset investments (FAI) and provide a further tailwind for Chinese stocks.

The bank noted that even though the private sector housing market is under pressure, property developers have quietly hopped on the government’s bandwagon for social housing.

The report noted that the current month would be the best time to gain exposure to Chinese stocks.

“We believe the MSCI-China may capitulate in June on a still-elevated CPI, high probability of an interest rate hike and rising concerns over GDP growth,” RBS said in the report.

It advises investors to buy high beta, upstream resources names, selected banks and property counters, and it maintained its view that FAI, not consumption, will power China’s recovery.

In its report released late May, RBS recommended stocks such as China Shenhua , Jiangxi Copper , Yanzhou Coal , China Merchant Bank and China Resources Land .