By Chua Kong Ho
April 23 (Bloomberg) -- China’s stock market is “overvalued” and could tumble another 18 percent as earnings decline and loan growth slows after a record first quarter, Morgan Stanley said.
“The market has rallied ahead of fundamentals,” said Morgan Stanley’s Hong Kong-based strategist Jerry Lou in a note today. Lou cut his view on China’s stocks to “cautious” from “neutral.” His target of 36.3 points for the MSCI China Index is 18 percent below the gauge’s close yesterday.
Loan growth is set to fall in coming quarters, causing deterioration in macroeconomic indicators such as the purchasing manager’s index and corporate earnings, Lou said. MSCI China companies may see profits tumble 15.4 percent this year, while those on the CSI 300 Index, measuring yuan-denominated stocks in Shanghai and Shenzhen, may drop 8.8 percent.
JPMorgan Chase & Co. strategist Frank Gong is more optimistic. He advised investors to buy shares of Chinese banks and property developers on “dips” as economic growth increases “significantly” from the first quarter. He expects the MSCI China to rise to 50 by the end of 2009, according to a note sent to clients today.
The MSCI China, which tracks mostly Hong Kong-traded Chinese companies, was at 44.29 at 9:43 a.m. local time, a gain of 8.4 percent this year. The CSI 300 has gained 42 percent.
Loan Growth
New loans more than tripled to a record 4.58 trillion yuan ($670 billion) in the first quarter after the government removed lending restrictions and urged banks to support a plan to revive the world’s third-biggest economy. The government pledged in November a 4 trillion yuan ($585 billion) spending program to revive growth after exports plunged with the global slowdown.
Regulators are growing more concerned at credit risks and the possibility that the boom will be followed by a collapse in lending, Deutsche Bank AG said last week. Goldman Sachs Group Inc. ended its recommendation last week to be “long” on China’s local-currency shares after the rally pushed the Shanghai Composite near its target.
Fund manager Wang Yawei of China Asset Management Co. pared equities and raised cash holdings in his flagship fund, saying valuations are too high and the market runs the risk of an asset “bubble.”
A sustainable rebound in China’s growth depends on the recovery in demand by consumers in the major economies, Lou said in the note.
“Ultimately, this loan growth-fed model cannot sustain without substantial G3 consumer demand,” said Lou. “We think China could see a double dip if it remains on the current policy path without significant rebalancing efforts.”
The International Monetary Fund said the global recession will be deeper and the recovery slower than previously thought as financial markets take longer to stabilize. The world economy will shrink 1.3 percent this year, compared with its January projection of 0.5 percent growth, the Washington-based IMF said in a forecast today.
To contact the reporter on this story: Chua Kong Ho in Shanghai at kchua6@bloomberg.net
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