Bloomberg News

China’s Lower Inflation May Boost ‘Beaten-Down’ Stocks, KKR Says

November 17, 2011

Nov. 17 (Bloomberg) -- Slowing inflation may allow China’s central bank to loosen monetary policies, boosting “beaten- down” stocks and other high-yielding assets, according to KKR & Co., a New York-based private-equity firm.

“Ongoing declines in Chinese inflation is bullish for beaten-down risk assets in the region,” strategists led by Henry McVey, head of global macro and asset allocation at the firm, wrote in a research note today. “It also reduces the likelihood of a hard landing” in the world’s second-largest economy, they wrote.

China’s inflation slowed to 5.5 percent in October from a three-year high of 6.5 percent in July after policy makers raised interest rates and reserve requirements, curbed lending and restricted home purchases in the past year. The Shanghai Composite Index of Chinese stocks has lost 15 percent in the past year. The index is trading at 11.6 times estimated earnings, compared with the average of 19.3 during the past decade, according to data compiled by Bloomberg.

Inflation may slow below 5 percent next year, allowing the central bank to reduce the reserve ratio requirement by the first quarter, “if not sooner,” wrote McVey. The economy may expand 8 percent in 2012, according to the company’s forecast, after growing at an annual average of 10.3 percent over the past decade.

China’s central bank said yesterday that it can’t loosen control over prices and reiterated Premier Wen Jiabao’s pledge to “fine-tune” policies when needed.

Price Stability

While inflation may continue to moderate, “the foundation of price stability is not yet solid,” the People’s Bank of China said in its third-quarter monetary policy report. “Extremely loose” global monetary conditions, and rising domestic labor and resource costs, may “exacerbate inflationary expectations,” according to the report.

A slowdown in China’s consumer price inflation is also “potentially conducive to global economic growth” and may lead KKR to raise its forecast for U.S. economic growth in 2012 from as low as 1.5 percent, McVey wrote.

KKR, founded in 1976 and run by Henry Kravis and George Roberts, oversaw $58.7 billion in assets as of Sept. 30.

McVey, the former chief investment strategist at Morgan Stanley, said investors have failed to allocate more assets to emerging markets, particularly Asia, where domestic consumption is rising. Pension funds should at least double their allocation in emerging-market stocks, bonds and private investments from the current range between 5 percent and 7 percent, McVey wrote.

--Editors: Marie-France Han, Brendan Walsh

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Cristina Alesci in New York at calesci2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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