Views from the Bund

- Key investment theme: "We expect China’s equity market to experience more volatility in 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% Q/Q 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 will 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-share performance), on sequential terms, is expected to bottom out, with the 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% Y/Y; (3) we believe the worst of the policy tightening environment may be behind us. Key investment risks include: (1) the market may be concerned about a return of government tightening measures, if CPI continues to surprise on the upside; (2) assetinflation risks, mainly on the property front; and (3) China’s A-share market to face potential supply side pressure in 4Q10."
- What is changing: "In light of our positive views on mid-cap sticky growth names in China’s consumer staple and low-end consumer discretionary sectors, and factoring in the four key consumer stock picking criteria, we have chosen 20 names to form the J.P. Morgan China Mid-Cap Consumer (sticky growth) Basket. The Bloomberg ticker for this basket is JPHCHMCS Index ."
- China model portfolio adjustment: "In our model portfolio, we are overweight on: (1) mid-cap consumer names in staple, low-end discretionary, and service areas; (2) menswear; (3) beneficiaries of western China development strategy and China’s visible railway capex; (4) insurance; and (5) mid-cap banks. We stay neutral on telcos, and underweight on commodities, energy, and property. We reduce our weighting in IPPs from overweight to underweight."

JPMorgan Views From the Bund 20100827

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