Bloomberg News

Deutsche Bank Underweights China Stocks, Morgan Stanley Bullish

May 15, 2012

Deutsche Bank AG (DBK) is recommending investors underweight Chinese stocks because the economy is undergoing a “messy transition” even as Morgan Stanley sees a 25 percent gain for the MSCI China Index (MXCN) by the end of the year.

While the nation’s equities appear cheap and may rebound in the “short term,” industrial overcapacity caused by the failure of the government to enforce plans for consolidation in major industries may hurt corporate earnings, John-Paul Smith, Deutsche Bank’s London-based emerging-market strategist, wrote in a report dated yesterday.

Deutsche Bank is the latest brokerage to highlight downside risks to the Chinese economy after data last week showed industrial output rose the least since May 2009, new loans missed estimates and import growth stalled. UBS AG (UBSN), Bank of America, Citigroup Inc. and JPMorgan Chase & Co. (JPM:US) are among banks that have cut their expansion estimates for China.

Chinese stocks fell today on concerns about the slowdown after the Shanghai Securities News reported that combined net lending for nation’s four biggest banks was almost zero in first two weeks of this month.

The MSCI China Index, which tracks mainland stocks that foreign investors can trade, slid 2.4 percent to 54.5 at 10:24 a.m. local time, paring this year’s gain to 2.8 percent. Morgan Stanley forecast the measure will reach 70 by the end of the year, while the Hang Seng China Enterprises Index (HSCEI) of Hong Kong- traded Chinese stocks may rally 32 percent to 13,400. The H-shares index slid 2.5 percent to 9,836.61, extending a slump to 17 percent from this year’s high in February.

‘More Clarity’

“Short term the market is certainly starting to look oversold and could well rally on a fall in the oil price or monetary easing, but until we can obtain more clarity about the structural drivers of the economy and the corporate sector, we remain underweight,” Smith wrote. “Like the U.S. in 2007, the superficially cheap valuations are signaling a major break in the growth model over the medium term.”

Premier Wen Jiabao is increasingly shifting to supporting the nation’s expansion from fighting inflation and containing property prices. April consumer prices rose 3.4 percent from a year earlier, staying below the government’s annual goal for the third month. The world’s second-largest economy cut the amount of cash that banks must set aside as reserves for the third time in about five months on May 12, pumping money into the financial system to support lending.

Authorities are easing monetary and fiscal policies more vigorously, inflation is being brought under control and the property market is stabilizing, Jonathan Garner, an analyst at Morgan Stanley (MS:US), wrote in a report dated today.

“The bear phase for equities has already ended,” Garner wrote.

For Related News and Information:

To contact Bloomberg News staff for this story: Weiyi Lim in Singapore at wlim26@bloomberg.net

To contact the editor responsible for this story: Darren Boey at dboey@bloomberg.net


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