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China Market Strategy - Range bound before the next bull market
China's equities will continue to rise throughout 2009. However, with global economic demand and China's external demand remaining weak, momentum risks running ahead of fundamentals, which will lead to stretched valuations. UBS believes that this will be the biggest challenge facing investors in China in 2009 as index prices become more sensitive to negative news. But important seeds for the next bull-run have been planted and strong liquidity and improving fundamentals will drive China to another multi-year high.
"While investors will continue to face challenges for the remainder of 2009, important seeds have been planted that will support a return to a bull market. The low interest rate environment in the medium term will continue to make equity investments more attractive and the pipeline of new government projects will ensure construction demand remains healthy for the foreseeable future," said John TANG, China Strategist at UBS Investment Bank.
The three pre-requisites for the next bull market are: recovery of external demand, substantial growth in large-item sales and an easing of over-capacity concerns.
"However there are still serious structural risks in the global economy with China facing the possibility of a slower pick-up in private investment and its external demand remaining fragile. With this in mind, investors need to be aware of the risk of a significant index retreat as valuations become stretched. Therefore UBS does not advise investors to fully load their portfolios or stick to a "buy and hold" strategy for now," said Tang.
UBS sets year end targets of 60 for the MSCI China Index and 12000 for the Hang Seng China Enterprises Index (HSCEI or H-Share Index) implying an upside of 11% and 13% respectively.
"Beyond 2009, UBS expects more upside risks as the global economic problems pass. And while we overweight financials, domestic consumption, energy and construction related sectors investors need to manage a range bound period before positioning for the next big bull market, " added Tang.