Buy China stocks in second half: CLSA

Investors should avoid buying China's stocks until the third quarter when the government starts unwinding measures to curb asset bubbles, said Christopher Wood, chief equity strategist at CLSA Asia Pacific Markets.

China's stocks plunged the most since August yesterday on concern government steps to cool the property market and European austerity measures will hurt economic growth. The Shanghai Composite Index dropped 136.69, or 5.1 percent, to close at 2,559.93, the lowest since May 4, 2009.

"I don't think we're near the end of the monetary tightening cycle," Wood, the second-ranked Asia strategist in Institutional Investor magazine's annual poll, said in an interview yesterday at the CLSA forum in Shanghai. "The government only started taking more aggressive measures in April. Buy stocks in the third quarter."

China last month imposed a ban on loans for third-home purchases and raised mortgage rates and down payment requirements. The central bank ordered lenders this month to set aside more deposits as reserves for a third time in 2010.

Even with the tightening measures, property prices jumped a record 12.8 percent in April from a year earlier and consumer prices rose 2.8 percent, the fastest pace in 18 months.

Premier Wen Jiabao said the government will "decisively" contain excessive increases in housing prices in some cities and curb growth of industries with overcapacity, the Xinhua News Agency reported May 15. China should keep the strength of macroeconomic controls "reasonable" and boost policy coordination, Xinhua said, citing Wen.

Chinese stocks will only "bottom" when it becomes clear the government's tightening is coming to an end, said Wood, who is based in Hong Kong. CLSA said it expects the central bank to raise interest rates in the second half of the year.

The nation's property prices will fall this year, hurting the outlook for other industries such as commodities, Wood said.

The Shanghai stock index has lost 22 percent in 2010, the world's fourth-worst performer among the 93 gauges tracked by Bloomberg, after surging 80 percent last year. The measure entered a bear market on May 11 after falling 21 percent from its Nov 23 high.

"Investors are worried that more property tightening is on the way even as Europe throws up more uncertainties about the global economy," said Michelle Qi, a Shanghai-based portfolio manager at Bank of Communications Schroders Fund Management Co, which oversees about $6.5 billion.

Europe's debt crisis may have spurred the Chinese government to put further tightening measures on hold, prompting Morgan Stanley to upgrade the nation's banks to "equal-weight" from "underweight" in its model portfolio.

The brokerage added Bank of China Ltd, Bank of Communications Co and China Construction Bank Corp to its portfolio, while "taking profit" in selective shares in the consumer, capital goods, auto and media industries, according to a note to clients.

European finance ministers return to Brussels yesterday a week after agreeing to a $1 trillion financial lifeline for the euro region. Ministers are under pressure to show they can reduce deficits fast enough to satisfy investors and then police budgets effectively once targets are met.

The euro will be on par with the US dollar "sooner or later" as the region's debt crisis worsens, said Wood.

He recommended buying emerging-market equities and shares of multinationals that sell to developing nations because of their faster economic growth prospects.

source: China Daily