August 2010: A volatile bottoming process ahead

Key market drivers: "MSCI China declined 2.6% over the past month, underperforming MSCI EM by 1.0%. We see mixed sector performance over the past month: healthcare was the best performer (+4.3% m/m), followed by utilities (+1.1% m/m) and consumer staples (+0.9% m/m). Financials turned out to be the worst performer, down 5.3% m/m."
Key economic events: "July macro indicators as well as August manufacturing PMI suggest that the notable economic slowdown in China since early 2Q could have stabilized somewhat recently at a lower level. IP rose 13.4%Y/Y in July, translating into a 0.5% m/m increase in June, following a 0.2% m/m decline in June. The NBS manufacturing PMIs gained 0.5pt to 51.7 in August from 51.2 in July, staying above the expansionary threshold of 50. Inflation-wise, July headline CPI rose at 3.3%Y/Y. On the policy front, we hold the view that the PBoC will raise the benchmark policy rate once, by 27bp in 4Q10. Our year-end Rmb/US$ target stands at 6.6."
Investment strategy review: "We expect China’s equity market to experience more volatility in the coming months due to downward earnings revision pressure as the economic slowdown ripples through the whole economy, but recommend buying on dips because: (1) China’s real GDP growth, on a sequential basis, may have bottomed out at 7.2% QoQ in 2Q10. Yet we believe China’s final demand growth will not bottom out until late FY10, because the modest sequential rebound in GDP in 3Q should be driven by a slowdown in de-stocking and the widening of the trade surplus on sharply falling imports, rather than by a decent recovery in final demand; (2) improving liquidity conditions – (a) China’s M2 growth (which tends to lead H-shares performance), on sequential terms, is expected to bottom out, with trend growth reaching a trough of 11.8% 3m/3m, saar in September before rising to 16.8% in December; (b) we estimate new loans made by Chinese banks in 2H10 will reach around Rmb3 trillion, up 37% YoY; (3) we believe the worst of the policy tightening environment may be behind us."

JPMorgan China Monthly Wrap 20100902

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