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China stocks to maintain momentum but at a slower pace

Hong Kong | | Media Releases APAC

The return on equity (ROE) of Chinese companies has been on the rise since 2003 and, as their operational and managerial competence improves, so their ROEs will continue to rise but less quickly than in recent years, says Henry HO, Head of China Research at UBS Investment Bank.

The upward march of Chinese stocks is set to continue in 2007, but at a more measured pace than in previous years, according to Ho. "We expect a moderately higher but volatile stock market in 2007. While it's a pause in China's multi-year re-rating rally, our 12-month H-share Index target is still 9,300, suggesting an upside of around 14% from levels now," he said.

Ho expects the China bull market to continue for some years and be accompanied by a series of long-term upgrades in earning estimates and quality, but, nevertheless, sounds a note caution for the near term. "We think that investors should be concerned about the recent optimism surrounding the market and be aware that the near-term risk of a tactical correction to the long-term upward trend has increased," he warns.

"The risk of earnings downgrades has increased as a result of the economic slowdown in China and globally in 2007. We expect a gradual slowdown in growth in China to 9.1% in 2007 but, if as our global economics team forecasts, there is a 100 basis point fall in the US Fed Fund rate over the coming 12-months, higher China share prices will be supported," he added.

In order to maximise returns, Ho recommends a focus on stock rotation rather than on sector rotation as in previous years.

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