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Oct. 14 (Bloomberg) -- China’s benchmark stock index may drop a further 10 percent from current levels by the year end because “high” inflation leaves limited room for the government to ease monetary policies, according to UBS AG.
Shanghai’s “A-shares will be under great pressure this quarter, as inflation is high and doesn’t provide much comfort for a policy easing,” said Gao Ting, chief China strategist at UBS, in an interview at Bloomberg’s offices in Shanghai. “Investors should stay cautious.”
Consumer prices in the world’s second-biggest economy increased 6.1 percent in September from a year earlier, the National Bureau of Statistics said today. That matched the median forecast in a Bloomberg News survey of 22 economists and followed a 6.2 percent gain in August. The government’s full- year inflation target is 4 percent.
Gao recommended investors buy so-called defensive shares including consumer staples producers as a hedge against tightening measures that have sent the Shanghai Composite Index down 13 percent this year. He also favors Chinese banks, citing potential growth in third-quarter earnings and “good valuations” after they tumbled to record lows.
The Shanghai Composite slipped 0.3 percent to 2,431.38 at the close, narrowing this week’s gain to 3.1 percent. The measure capped its best weekly rally since August on government support measures. Besides the State Council’s announcement it will provide easier access to loans for smaller companies, Central Huijin Investment Ltd. began buying shares of the nation’s four-biggest lenders and Xinhua News Agency reported regulators approved cross-border exchange-traded funds.
The government will introduce more policies to boost economic growth as exports slump, Jing Ulrich, Hong Kong-based chairman of global markets for China at JPMorgan, said in a Bloomberg Television interview today.
Today’s inflation data was “encouraging,” and gives the government leeway to ease monetary policies, Ulrich said. She favors industries such as consumer, telecom, Internet and travel. The strategist said bank and property stocks face continued “downward pressure.”
UBS’ Gao said investors should avoid cyclical industries including construction materials, steel, shipping and ports.
“The economic slowdown is mainly driven by slower growth in exports that may lead to earnings declines in related industries.”
--Irene Shen. With assistance from Margaret Conley in Shanghai. Editor: Allen Wan
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