Credit Suisse Asia Equity Focus Robust China PMI offers positive catalyst for Asian stocks

China PMI offers positive surprise and eases double-dip fears
China's Purchasing Managers Index (PMI) data for September surprised the market on the upside, with the headline PMI rising 2.1 percentage points to 53.8 from August's 51.7 and a board-based strengthening of other key sub-components. This marks the second consecutive monthly increase of the China PMI, reflecting a reduced growth risk in the Chinese economy. The key sub-components of output and new orders rose strongly to 56.4 and 56.3 respectively from 53.1 in August, representing the strongest rebound in the two indicators since Q1 2009.

The strong rebound in China's PMI new orders sub-index and the 4.5 percentage points' increase in the import sub-index to 52.9 from 48.4 in August suggest a firm industrial production outlook in the coming months. We highlighted earlier that the
China PMI data series typically witnesses a seasonal weakness during the summer months between May and July and its recent recovery does not come as a total surprise to us. With the strong rebound in China's leading economic indicators, we believe the People's Bank of China may well raise interest rates by 27 basis points
in Q4 2010 and allow the CNY to strengthen further to mitigate imported inflation.

In our view, China's latest PMI data, together with recent global leading indicators,
underscore that a double-dip global recession is increasingly unlikely. We expect fading double-dip fears, coupled with aggressively accommodative global monetary
policy, will remain very supportive of the equity markets. Near-zero interest rates,
combined with the sustained global recovery and positive earnings momentum, are
positive drivers for global equities whose relative valuations versus bonds look
particularly compelling, based on historical comparisons after the strong rally in the bond markets, driven by safe-haven flows. We maintain our positive strategic view
on global equities on a 6–12-month investment horizon and are now awaiting either
a clear technical upside break or a marked correction to trigger a tactical upgrade of the equity arrow back to overweight. Investors should take advantage of any short-term tactical pullbacks to rebuild strategic overweight positions in equities.
Cheuk Wan Fan, Phone: +852 2841 4841, cheukwan.fan@credit-suisse.com