With the Year of the Rat underway, the Chinese equity market is starting to look attractive again after the sharp correction in late 2007, says Richard Wong, investment director of equities at HSBC Group's Halbis Capital Management. But the time to buy may be limited given his expectation that the current overhang will likely disappear in the second quarter.
Earnings growth remains strong at an expected 30% this year and Hong Kong-listed stocks are trading at much more attractive levels at a forward price-to-earnings ratio around 15 times, Halbis said in a report.
Mr. Wong, who manages the $5.8-billion HSBC GIF Chinese Equity Fund, has no doubts that the near-term uncertainty will remain. However, he also thinks stocks could climb higher in the second quarter of 2008 if both the U.S. outlook and impact of inflation in China become clearer.
In terms of a U.S. recession, while he thinks it may lead to a marginal slowdown in China's export growth, the impact is not expected to be severe. "This is because China has emerged as a global economic powerhouse in its own right," he said, noting that China has increased its exposure to the rest of the world, while reducing its dependence on the U.S., which accounted for only 19% of its total exports in 2007. Exports to Europe exceeded this number and the Chinese economy is also well-supported by strong domestic consumption, he added.
Mr. Wong also believes that the Chinese Government may hike interest rates to help reduce inflation ahead of the National People's Congress meeting in March 2008.
However, any interest rates rises would not have a substantial negative impact on Chinese equities.
The manager also pointed to lower corporate taxes in China and increased allocation to China equities due to higher market capitalizations as factors that could help equities there.
Furthermore, the trend of industrial consolidation with mergers and acquisition opportunities may continue to unlock company value and improve pricing power.
As far as the sectors Mr. Wong likes most, he sees plenty of opportunity in consumer-related, travel and infrastructure names, as well as selected commodities such as coal and cement.