Concerns over a slowdown in the world’s second largest economy sent Asian stocks lower on Tuesday, but market watchers expect monetary easing around the world and in China to help renew the region’s bull run, with mainland stocks among the big gainers.
“This [China’s growth target of 7.5 percent] is political posturing in a very political year - I don't think it's a major issue for the markets. Markets are just having a breather at these levels before we have them at the next leg of the bull market,” Kerry Series, Founder & CIO at Eight Investment Partners said.
According to Series, once the MSCI Asia Ex-Japan Index, hits the 500 mark, which is about a 14 percent upside from current levels, the market will move to “new levels”.
“In January and February, investors took the MSCI Asia Ex-Japan Index up to 450, we need to get back up to 500 to get to the position where we were before the sell-off in August and September last year,” he said.
Easing to Feed Bull Market
Series believes the bull market will be fed by easy monetary policy globally. “China has now joined the group of governments that are easing. Once we get the inflation number out on Friday, we'll then see more aggressive easing from China, so globally central banks are providing the feed [for a bull market],” he said.
He forecasts a 3.5 percent rise in the Consumer Price Index for February, below the government’s 4 percent target.
Chi Lo, CEO of HFT Investment Management agrees that China will embark on a path of further monetary easing in the coming months, adding that this will be positive for the country’s stocks.
“The government is telling the market [by the 7.5 percent growth target] that they are expecting the economic slowdown to continue which is paving the way for supportive stimulative policy down the road,” Lo said.
Buy Undervalued H-Shares
Series says it’s important for investors to recognize that the process of rebalancing the Chinese economy will be slow and that investment-led growth will continue.
“Investment and demand for resources will remain at high levels. We do think rebalancing will happen over time and make the Chinese economy healthier but the outlook for next few years is that investment-led growth will still be a dominant factor in the economy,” he said.
He believes investors should use this opportunity to buy undervalued mainland stocks listed in Hong Kong.
“When you're buying stocks at half book value or less, it's a much easier environment for those stocks to rise very rapidly,” he said.
Series says his focus at the moment is on Chinese financials, resources, and industrials, with real estate developer KWG Property , coal miner Hidili Industry International Development and distributor of home appliances Huiyin Household Appliances his top picks based on their current cheap valuations.
KWG Property, one of the largest privately owned property developers in Guangzhou, is currently trading at a price-to-earnings ratio of 5.6 times. Series believes the government will successfully prevent a collapse in the property sector and that investment will continue into the country’s real estate market.
An adviser to the People's Bank of China hinted at a possible easing of property measures on Tuesday, with comments such as China should “loosen its grip on genuine property buyers” and a property market crash would be “damaging” to the mainland economy.
Hidili Industry International is trading at a price-to-earnings ratio of 8.14 times.
“If the investment-led part of the economy continues to be significant, coke and coal, a key factor for steel, will be in demand,” he said. China is a leading driver of steel demand, consuming around 50 percent of global output.
On the other hand, Lo recommends investors take a look at beaten-down Chinese banking stocks, as the longer-term outlook for the sector has turned positive, helped by Beijing’s easing of new capital rules and the peaking of the interest rate cycle.