The stock market may consolidate in the summer after the rapid run-up in 2Q09. Fundamentals continue to move in the right direction, in our view. 2Q09 economic data should confirmt the strong re-acceleration of the economy, with surprises likely still onthe upside despite significant consensus upward revisions lately. We still expect a sustained economic recovery into 2010, and ongoing positive earnings revisions for both FY09E and FY10E should underpin a notably higher move in China’s equity markets after a brief consolidation.
Ongoing tailwinds, including the continuation of the current accommodative policy environment, strong Y/Y loan growth, and credit expansion should continue to bolster the earnings visibility of domestic demand-sensitive companies, especially banks and property developers. We expect a continued stable policy environment in real estate. When external demand remains weak and the authorities have to further sustain and stimulate domestic demand, they are unlikely to come out with widespread policies to suppress household demand for property/real estate, in our view.
We believe a more private and domestic demanddrive growth could help further re-rate MSCI China. We raise our MSCI China Dec-09 target from 50 to 60. At 60, MSCI China would be valued at 12.9x FY10E P/E (based on our FY10E EPS growth of 20%), largely on par with its median historical one-year forward P/E of 13.2x. We raise our H-share Dec-09 target to 12500 (previously 10000).
Corporate sales and profits are expected to show marked sequential improvements. We remain positive on the A-share market on improving fundamentals and favorable liquidity conditions.
We still see a possible near-term RRR cut, and a cut in the deposit rate (although the chance would be smaller if inflation expectations continue to strengthen). We continue to increase exposure to small-to-mid-cap banks and property, and recommend accumulating these stocks if there is any share price consolidation in the summer.
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