Interesting report from Deutsche Bank’s Jun Ma, who says that China is beating inflation, and that rate hikes will taper off, which means it’s time to get more bullish.
Recent developments are increasingly supportive of our view that yoy CPI inflation will likely peak in June at around 5.8%, then fall to around 4% in December. mum inflation most likely has already peaked. 1) The daily agriculture price index fell 6% in the last 40 days, which implies a mum decline in food prices in March-April. 2) Domestic oil prices are being effectively controlled, with very little pass through from global oil shocks. 3) Property prices are being contained, thus limiting the future upward pressure on residential rentals. 4) The base effect will be extremely favourable for yoy CPI in the second half of this year. Just due to the base effect, yoy CPI in Q4 should decline by about 1.3ppts.
As such, policy tightening will get less aggressive:
We expect policy tightening to become less aggressive in the coming 1-2 quarters. 1) The frequency of rate hikes will likely fall significantly after April. 2) M2 growth has already decelerated by 14ppts in the past 14 months, and this deceleration will likely end soon. 3) The declining trade surplus will likely lead to less-aggressive RRR hikes in the remainder of this year. 4) The probability of food price control is clearly on the decline.
And so, it’s time to buy stocks:
We expect MSCI China to re-rate to a normalized 13x forward PE (from the current 11.5x) in the coming 1-2 quarters as the macro risk recedes. We believe that the property, banking, steel cement and power sectors will likely outperform the index during this period, while telco will likely underperform. On a 12-month basis, we expect MSCI China to rise about 25% from its current level.
Here’s a look at wholesale agriculture prices:
Photo: Deutsche Bank
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