Views from the Bund

Key investment theme: "We believe MSCI China may see a near-term rebound because: (1) MSCI China’s weak performance YTD may have factored in some bad news about the economic slowdown; (2) China’s liquidity situation has started to see some improvements; (3) the Ministry of Agricultural index fell for the second straight month by 1.4% in June, which
could give governing authorities more leeway in their adjustment of monetary policies when needed. However, we stay cautious on MSCI-China because: (1) we see continued downward earnings revision risk as China’s economic slowdown ripples through from macro-sensitive sectors, such as steel, to more downstream sectors such as property, industrials, capital
goods, and airlines, etc; (2) a number of sector-specific policy risks to hurt earnings of and to de-rate multiples of related companies; and (3) banks’ fund-raising activities are only half-way through. Amid market volatilities, we identify investment opportunities from China’s economic rebalancing: (1) China’s consumer staple and low- and medium-end consumer
discretionary sectors, given (a) these sectors’ sticky growth track record both in upturns and downturns of the economic cycle; (b) China’s ongoing wage hikes; (c) the urbanization trend in central and western China; (d) the fact that these sectors are already subject to complete market competition, and are subject to the least policy risk; (e) the emerging consumer finance industry in China to boost consumption. Based on case studies of Hengan and Changyu Wine, we hold our view that quality mid-cap (US$1-3B) names in consumer staple and low- and medium-end consumer discretionary sectors that are trading at teens’ multiples may offer the best opportunity to repeat Hengan’s and Changyu’s very high share price increase of 50x over 10 years. (2) Investment opportunities arising from the Western China Development strategy. (3) Investment opportunities from the railway sector’s visible capex, such as China Railway Group."
What is changing: "China has released policies such as: (a) introducing the new resource tax charged at 5% of the revenue for coal, natural gas and oil companies; (b) putting price caps for coal companies; and (c) requiring a real name registration system for the online gaming sector."
China model portfolio adjustment: "We are bullish on consumer staples low- and medium-end consumer discretionary, expressways, IPPs, banks, and insurance, while we are bearish on commodities, property, energy, paper, and airlines."
JPMorgan China Equity Strategy Economics 20100716

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