China Stocks Rally to Falter, Goldman Sachs Says; UBS Disagrees

By Zhang Shidong and Chua Kong Ho

Feb. 9 (Bloomberg) -- A rally in Chinese stocks since November will falter as earnings slump 17 percent this year, Goldman Sachs Group Inc. said. UBS AG disagrees, saying investors are prepared for the company results.

“There won’t be a sustained bull market,” Thomas Deng, the Hong Kong-based head of China strategy at Goldman Sachs, told a Shanghai press conference today. “It will take at least three years for China’s economy to move out of the down cycle.”

The benchmark Shanghai Composite Index, the world’s best performer this year, has rallied 21 percent as the government announced a series of support measures after pledging 4 trillion yuan ($585 billion) of spending on Nov. 9 to revive the economy. The central bank has also cut the key lending rate five times since September to support industries and stem job losses.

The rally that made Chinese stocks the best performers in the world this year will continue as earnings improve and bank lending increases, Li Chen, Shanghai-based strategist at UBS, wrote in a note sent to clients today.

“Investors are prepared for poor economic data and earnings,” Li said. “Any positive news is likely to be exaggerated in the first quarter.”

China’s construction-related companies are expected to report higher second-quarter earnings compared with the prior three months, and their shares should perform better than the market as bank lending expands and infrastructure investment increases, the note said.

China’s purchasing manager’s index, a gauge of manufacturing, rose to 45.3 in January from 41.2 in December, the China Federation of Logistics and Purchasing said Feb. 4.

It’s too early to tell from the gain in the January purchasing manager’s index and the “few days of good rally” in the stock market whether economic growth will rebound, Morgan Stanley’s China strategist Jerry Lou said in a Bloomberg Television interview today.

“It could be the bottom, but to conclude a reacceleration from here is a little premature,” he said.

To contact the reporters on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net; Chua Kong Ho in Shanghai at kchua6@bloomberg.net