Asian markets initially sold off today, after China surprised with a 25 basis point rate hike, but they regained some of their lost ground with mainland Chinese stocks actually closing in positive territory.
Perhaps investors were thinking as Goldman Sachs’ Helen Zhu is, who told clients to use any weakness as a buying opportunity.
We may see ST profit taking, but would buy value sectors on dips Given the strong rally since start of Sept for MXCN (+14%) and for CSI300 (+17%), and the more surprising nature of this rate hike, we may see some profit taking near-term, especially on recent outperforming sectors that are perceived to be negatively affected (such as property, materials). But, we would buy into any major market dips for the medium to longer-term upside as we believe that earnings are solid, valuations are reasonable, and the rate hike could actually remove a risk overhang. Our Econ team does not expect more rate hikes ST, unless CPI further surprises significantly. The current 3-4% CPI is far from 2007/08 peak). Although LT deposit hikes exceeded lending rate hikes, our Banks team estimates slight net positive NIM impact as demand deposits are not affected, and believes this could be a re-rating catalyst – smaller banks are best positioned, followed by big banks, then insurers. Consumer retail should also be a CPI beneficiary.
The best way to probably view China’s interest hike is that it’s a sign of confidence in China’s economic growth from the government. They are trying to engineer a soft landing from their post-crisis rebound, and this interest hike is a tool at making this happen given that inflation, not a lack of GDP growth, is China’s prime concern right now.
It remains to be seen if the interest rate hike is successful at helping bring inflation under control, but at the very least it’s likely a step in the right direction for China’s longer term.
(Via Goldman Sachs, China: Portfolio Strategy, 20 October 2010)
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