J.P. Morgan Asset Management sees attractive buying opportunities in China equity markets

Mar 28, 2011

J.P. Morgan Asset Management believes that the current valuations of China A-shares and HK-listed Chinese equities provide investors with a good opportunity to add exposure to China.

Hong Kong, 28 March 2011:  J.P. Morgan Asset Management (JPMAM) believes that the current valuations of China A-shares and HK-listed Chinese equities provide investors with a good opportunity to add exposure to China.  The firm remains overweight the China market and sees moderate interest rate increases as having limited effect on the medium-term investment environment.  The secular growth story of China’s rebalancing of its economy from an investment-driven to a consumption-driven model remains.

Speaking at a press conference today on the outlook for China equity markets, Shumin Huang, a China specialist with the Pacific Regional Group at JPMAM noted, “Following China’s year-on-year economic growth of 9.8% in 4Q2010, inflation expectations remain high.  We expect China’s inflation to stay above 5% in 1Q2011, given the low base effect and food price pressure caused by weather disruptions and the seasonal Chinese New Year demand.  In addition, we forecast China’s consumer price index (CPI) to peak in June this year at around 6% year-on-year growth.”

“With inflation taken into account, China’s real interest rates remain negative for bank deposits and just slightly positive for lending.  Compared to other large emerging nations like Brazil and India, China has been relatively conservative in raising interest rates, and thus more interest rate and reserve requirement hikes are expected this year.  Though we would stress that, in China, interest rates are not the main monetary policy weapon to fight inflation. They remain subsidiary to controls on bank lending, and interest rate hikes are not necessarily bad for markets as they can help to keep the economy healthy, inflation under control, and inflation expectations well-anchored.”

“While inflation and interest rate hikes have been conducive to market sentiment in some cases, we expect markets to refocus on growth prospects as policy noise subsides.  Our bottom line is that the Chinese equity markets have already priced in rising inflation concerns and worries over policy tightening.  As such, we seek to accumulate quality names on weakness.”

Both A-shares and HK-listed Chinese equities are now trading below long-term averages, with attractive valuations after their underperformance in 2010 and higher returns on equities (ROEs) than historical levels.  Among the significant underperformers were policy-constrained sectors including banks and property, where JPMAM believe many uncertainties have been priced in as the government’s tightening policies have been proactive.  Although policy risks remain a challenge, banks and property developers have been market laggards, with undemanding valuations.

In addition, Chinese equities have lagged on policy normalization and tightening moves despite strong fundamentals as the corporate sector remains solid. Globally, Chinese ROEs are compared favourably and companies have much stronger balance sheets than their emerging market peers.  Corporate fundamentals are largely tracking above market expectations, even for those associated with policy tightening.  JPMAM expects EPS growth for CSI 300 and MSCI China to average around 20% and 15% respectively in 2011, piggybacking on domestic sectors such as consumer, healthcare and industrials, while financials and commodities remain proxies for the macro growth story.

“We maintain our positive view on domestic consumption and continue to see growth potential and investment opportunities in this sector driven by income growth, urbanization and favourable government policies.  The National People’s Congress held in early March reiterated the goals of the Twelfth Five-Year Plan to promote more sustainable and balanced economic growth drivers – investment and consumption – with continued industrialization and urbanization.  More medium-term targets to support these two economic growth drivers have been set and sectors like home appliances, consumer staples, discretionaries, healthcare and property are likely to benefit,” Shumin added.

“In the near term, while lower CPI and PMI numbers in February helped mitigate tightening concerns, uncertainty still lingers in 2Q2011 given the recent sharp rise in oil price and continued uncertainty in global markets.  There are also worries over growth deceleration as China is rebalancing towards a more domestic demand-driven economy, but we see slim chance of an abrupt slowdown.  Continued official efforts to tackle inflation and set the economy on the path of sustainable growth are expected, but not aggressive actions that could unsettle the economy’s underlying momentum.”

In JPMAM’s views, the macro environment over the next 3-6 months will remain challenging as markets will most likely range trade along with policy sentiment, in addition to continued global market volatilities amidst uncertainties in the external environment.  Our prediction is that China’s economic growth will be around 9% for 2011 and average 8-9% a year over the next five years, with consumption and continued urbanisation the primary growth drivers.

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For further information please contact:
Daniel Chui, Head of Investor Communications  
Telephone: (852) 2800 2874    
Email: daniel.wc.chui@jpmorgan.com  

Harriet Ngan, Internal & Media Communications
Telephone: (852) 2800 2776
Email: harriet.hy.ngan@jpmorgan.com

Issued by JPMorgan Funds (Asia) Limited

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Notes to Editors

J.P. Morgan Asset Management (“JPMAM”) is the brand name of J.P. Morgan Chase & Co’s asset management companies.

J.P. Morgan Asset Management is a global asset management leader providing world-class investment solutions to clients. With almost US$1.3 trillion in assets under management (the Asset Management client funds of J.P. Morgan Chase & Co. as at 31 December 2010) and offices in 41 locations around the world, J.P. Morgan Asset Management offers global coverage with a strong local market presence, and leadership positions in most asset classes.

Commitment to Hong Kong
JPMAM’s investment management business in Asia has remained headquartered in Hong Kong for more than three decades and today has over 500 employees based in this location. JPMAM and its investment arm - JF Asset Management - are one of the largest local investment managers in Hong Kong with over US$96 billion (31 December 2010) of funds managed across the Asia Pacific region.

As part of a major global investment group, we are committed to providing specialist teams with the resources needed to deliver successful products and performance to our clients. The Hong Kong-based Pacific Regional Group, together with the local presence of the Global Portfolios Group, forms the core of JPMAM’s investment management operations. In addition to the knowledge and experience of our individual investment professionals, the stability of the team has enabled JPMAM to develop strong relationships with local clients.

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