After a few days ago we released the "definitive" factual presentation on China courtesy of HSBC, today we look at the future of the only country that matters (and which according to Goldman was the only saving grace for America, decoupling and what not, before the firm went full propaganda retard) with CLSA's complete (124 pages) and historically very authoritative 2011 outlook on China. While not a departure from conventional wisdom in any way, all those who wish to follow trends and be part of the lemming herd for as long as possible, are advised to read the report: it will certainly permit the collection of a few pennies before the rollercoaster shows up. And when that happens, everyone will naturally quickly and quietly pocket their profits and head for exits in a cool, calm and collected manner. Because, after all, what else can you do when "trading the tape" aka being a momentum trader, is all that works...
In 2011, Beijing will be firmly on top of the liquidity bull unleashed in 2010, however it must be cautious in a year without stimulus. While excess liquidity will be a market negative as in 1H10, we are confident that the government can rein in rising prices, but do not expect inflation to peak until 2Q11. This could provide a buying opportunity as the market is likely to rally once tightening ends. The New Year marks the start of the country’s 12th Five-Year Plan and a transition to new leadership. Key policies - supported by innovative tax reforms - centre on boosting income, energy efficiency, urbanisation and strategic industries. We forecast 25% upside for MSCI China and 20% upside for HSCEI next year, implying 13x and 12x 2012 PE.
The IMF estimates that global investors are still underweight emerging markets. A 1% reallocation of global portfolios could bring more capital in than at the 2007 peak. On top of this, China has had to fend off the impact of hot money from currency appreciation. These capital flows, coupled with unprecedented loan growth, have seeped into CPI inflation and the government is likely to impose further capital controls. We are at the beginning of a rate-hike cycle, but are unlikely to see a repeat of 2007-08 as Beijing has been proactive in tightening credit. The renminbi should appreciate about 5%, but not much more, given the lessons learned from yen appreciation and Japan’s lost decade.
The USA’s second round of quantitative easing has increased China’s concerns about its trillions of dollar reserves and its reliance on the greenback. The PBOC believes the credit crisis is due to the “Triffin dilemma” which states that the country providing an international reserve currency must be willing to run large deficits to supply the world with enough of its currency. This is why China has accelerated renminbi internationalisation to eventually make it a reserve currency. The mechanics require a large amount of renminbi circulating offshore that could overwhelm Hong Kong which is already battling asset-inflation problems. A logical next step would be to reintroduce the individual Qualified Domestic Institutional Investor (QDII) programme.
Our 2011 survey indicates that fund managers are bullish on China, especially A shares. They are most positive on consumer stocks, negative on property and split on the banks. The biggest fear is inflation. Next year, we could see a repeat of 2004, where markets rallied once tightening was done. We would remain tactically Underweight banks, consumer staples and property until inflation peaks. Without stimulus, we are cautious on steel, machinery and construction. We are Overweight the internet, consumer discretionary, gold, insurance, transport, industrial and energy sectors. Our 2010 top picks did well with Baidu up 166% YTD, Dongfang 89%, Air China 71%, Ctrip 23% and CRL -18%, while our China portfolio is up 19% YTD, outperforming the MSCI by 13%. Our 2011 top picks are Baidu, GCL-Poly, Sands China, Great Wall and Ping An.