CLSA SAYS Hong Kong shares are likely to rise 24-25% over the next 12 months.
However, the French investment bank cautions that the property sector – long a driver of the Hong Kong bourse – will lag behind the benchmark index.
A Chinese language piece in Sinafinance cited CLSA market watchers as saying the downside risk to the forecast would come in late 2012 or 2013, when the US might have to resort to an interest rate hike to stem anticipated inflation.
“If this happens, then the biggest casualty here would be property developers, because they are one of the most exposed sectors to credit availability. It would introduce a critical and high-risk phase for the real estate industry,” the report said.
CLSA’s Managing Director of China Research, Zhang Yaochang, said that price-to-earnings (P/E) ratios will also rise over the next 12 months.
“Currently the average P/E in Hong Kong is below 10x, but this should rise to 11x forward earnings.”
Mr. Zhang remained upbeat on all public utility and consumption plays.
“Even with the slower economic growth we are seeing, I am still quite confident about the prospects for domestic consumption.”
He added that interest rates in the world’s biggest economy would likely remain at a “low level” for another year or two, the report said.
“The US Federal Reserve is likely to hike rates by that time which will present great challenges for Hong Kong-listed property developers. However, I believe the sector will hold its own and not collapse.”
He went on to say that securities will become more attractive relative to precious metals going forward.
“The stock market is undeniably in a very volatile state right now, and gold is overpriced. But funds and investments will help settle things down and bring more stability and support for Hong Kong’s property market.”
As for the Mainland Chinese market, CLSA expects inflation in the PRC to fall back to around the 4-5% level by the end of this year.
But a total relaxation on credit growth is unlikely in the current half, although this might become more a possibility sometime next year.
Zhang added that although the Mainland Chinese economy will experience slower growth going forward and corporate earnings will fall by around 10% next year, the PRC’s GDP growth will still likely hover around the 8-9% level in each of the next five years and a hard landing is highly unlikely.
Zhang’s colleague, CLSA China Macro Strategist Andy Rothman, said Mainland China’s GDP growth this year should be around 9.5%, but that due to the negative impact of the ongoing budgetary and debt crises in the EU and US, exports from the PRC will suffer a slowdown and economic growth in the world’s No.1 economy – China – will likely come in at 8.5% next year.
As for reports of out-of-control debt burdens by local governments in the PRC and the challenges they pose for the country’s lenders, CLSA forecasts that 18% of all domestic borrowings – around 10.7 trillion yuan -- classify as troubled loans from local governments.
The French investment bank went on to say that there appear to be no clear solutions to the local debt problems in Mainland China, but that it is likely that the Central Government and lenders will gradually absorb some of the more outstanding local debts in the country.
Despite these worries of overleveraged local governments and institutions, CLSA continues to maintain that PRC lenders' valuations in Hong Kong remain at “attractive levels,” the report said.
It currently prefers Agricultural Bank of China (HK: 1288) and Bank of Communications (HK: 3328) among China's lenders.
As for the real estate sector, CLSA expects property prices in the PRC to fall around 10% in 2012.
“Next year, Beijing will realize that developers are slowing their land bank accretions and reducing the availability of high-end properties which will help support upscale unit prices. Therefore, by the middle of next year, macroeconomic controls over the real estate sector will be eased.
The report added that Mr. Zhang is more bullish on Country Garden Holdings Co Ltd (HK: 2007) and KWG Property Holding Ltd (HK: 1813).
His colleague, CLSA’s Director of A-share Research Yan Xianming, cautioned that slower expected fixed asset investment, particularly a sharp drop in railway investment, could lead to a much more substantial downside risk to corporate profits.
Yan added that capital spending on the PRC’s infrastructure will return to a “growth phase” next year, and said coal, copper, gold and consumer-related shares remain good bets for now.
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