Soft landing & domestic consumption as the drivers for Greater China markets

Jun 28, 2011

The combination of a soft landing in China's economy and a continued boom in domestic consumption will drive equity market performance in the coming 6 months.

Hong Kong, 28 June 2011: J.P. Morgan Asset Management (JPMAM) believes that while external economic issues will be a multi-year source of volatility in markets, that the combination of a soft landing in China’s economy and a continued boom in domestic consumption across Greater China will drive equity market performance in the coming 6 months. 

Howard Wang, Head of Greater China team at JPMAM noted, “While Chinese monetary policy will likely remain tight in the near-term given the ongoing effort to contain inflation, we expect a soft landing in growth numbers and a renewed appreciation of China’s secular potential, particularly relative to other major global economies. We are optimistic that these factors, particularly when placed against the background of supportive valuations and the length of the correction in equity markets, will drive a more sustainable rally in China-linked equities.”

“We believe the probability of a hard landing in China is low as social housing build will accelerate in the coming months and the current slowdown is almost wholly a result of harsh governmental tightening policies that can be reversed or selectively-enforced if need be.”

“We find traditional Hong Kong blue chip stocks of slightly less interest given the property and monetary policy tightening cycle is less advanced than on the mainland while valuations, while attractive in absolute terms, are not as cheap versus fair value than in China.”

“Our base case scenario calls for China to avoid a hard landing as inflationary pressures moderate during the second half of the year. Any reversal in the loose US monetary stance could have a meaningful negative impact on Hong Kong, especially given weak local dollar deposit growth – however, given recent weak data from America, we consider this to be an issue for the latter half of 2012 or beyond.”

In this environment, investors are best positioned to benefit from more peripheral areas in the Hong Kong stock market such as domestic consumption and Macau gaming.

Taiwan, supported by exceptional performance in certain sectors within the technology universe and buoyant investor sentiment in view of the presidential and legislative elections in January 2012, delivered strong performance in the first half of 2011.

Taiwan’s GDP growth in 1Q’2011 was revised up to 6.6% with CPI coming in lower than expected and unemployment reaching a 31-month low at 4.3%. Improving cross-straits relationships and the upcoming elections bode well for Taiwan’s stock market in the second half of the year. Historically, Taiwanese equities have tended to perform well a few quarters ahead of the elections, led by domestic-oriented sectors, which are driven by upwards earnings revisions.

“We are positive on the technology sector in Taiwan as the supply chain shocks from the Japanese earthquake are proving to be milder than previously feared while from a secular perspective, demand for mobility devices such as smart phones and tablet PCs continues to be very strong even given global economic uncertainties.”

All in all consumption remains a key investment theme in the Greater China markets. Department stores and retailers stand to benefit from the wealth accumulation and expanding consumer affordability that are turning China into the world’s largest luxury market.

“We continue to build positions incrementally in Taiwanese and Chinese financials on the expectation of a better policy environment in the next six months. We also like the domestically- linked commodities in China such as cement.  Finally, we see strong long-term growth potential in alternative energy. For instance, natural gas is expected to be the fastest growing form of energy consumption in China.”

In JPMAM’s view, the Greater China markets continue to offer attractive investment prospects going into the second half of 2011.  Easing inflation and tightening pressures, coupled with attractive valuations, should continue to provide investors with compelling long-term investment opportunities.

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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 over US$1.3 trillion in assets under management (the Asset Management client funds of J.P. Morgan Chase & Co. as at 31 March 2011) 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$91 billion (31 March 2011) 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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