China: July 2010 - Play the rebound, but watch out for the potential risks

- Key market drivers: "MSCI China rose 4.1% over the past month, underperforming MSCI EM by 1.8%. All sectors recorded positive returns. IT sector was the best performer (+12.2% m/m), followed by Materials (+11.6% m/m) and Industrials (+11.2% m/m). Telecom turned to be the worst performer, up only 1.3% m/m."
- Key economic events: "China’s 2Q10 and June macro indicators, as well as July’s manufacturing PMIs, have continued to show a moderation in the country’s growth momentum. Real GDP rose 7.2%q/q saar in 2Q, following an increase of 10.8% q/q saar in 1Q. IP rose slower than expected, up 13.7%Y/Y in June compared with 16.5%Y/Y in May. Moreover, the NBS manufacturing PMI fell from 52.1 in June to 51.2 in July, registering the lowest reading in 17 months. Inflation-wise, June headline CPI rose at a slower-than-expected 2.9%Y/Y. On the policy front, we expect the PBoC to raise the benchmark policy rate once, by
27bp in 4Q10. Our year-end Rmb/US$ target stands at 6.6."
- Key company news: "We now believe that the current rebound in China equities may prove to be longer and more powerful than we originally thought back in earlier July. This is because: (1) China authorities recently voiced dual emphasis on maintaining a relatively fast growth rate and adjusting economic growth mix towards consumption, which marks a slight change from its previous focus on managing inflationary expectations and adjusting economic mix; and (2) China’s macroeconomic data for July may point to sharp sequential slowdown,
thus increasing investors’ expectations that the authorities may loosen their monetary tightening and refrain from harsher measures. That said, we refrain from calling a major turnaround in China equities, as: 1) We see continued downward earnings revision risk, as China’s economic slowdown ripples through macro-sensitive sectors; and 2) A number of
sector-specific policy risks could hurt earnings and de-rate multiples of related companies."

JPMorgan China Monthly Wrap 20100802

No comments:

Post a Comment