As the end of the year approaches, it is time for a quick taste of what’s coming up in 2011.
According to the stock pickers at Morgan Stanley, next year is going to be a good one for Chinese equities, despite deepening worries about inflation and the government’s response to it.
The recent Politburo Working Meeting decided that the fiscal policy for 2011 would be "appropriately accommodative" (the same as in 2010) and that monetary policy would be "stable and healthy" (slightly less bullish than the "appropriately accommodative" they recorded in 2010).
Morgan Stanley reckons that inflation will peak in the middle of next year and be around 4.5% for the year as a whole. "We think mild inflation should favor stocks," the bank says, helping to underpin corporate earnings. It adds that the rest of Wall Street has overegged its panic about Chinese inflation (despite the official statistics, as we have discussed before, being clearly a touch low).
Instead, Morgan Stanley is more concerned about whether banks are told to rein in their loans. The bank also points out that if the US bounces back more strongly, it could export more inflation to China in the form of higher oil and food prices, which would force the hand of the Chinese government to curb the problem.
Nevertheless, they are tipping large-cap banks, property, insurance, steel, cement and energy companies to do well. Despite the growth in domestic consumption, they don’t like consumer stocks as much, and are scaling back their recommendation on the auto industry (it’s hard to see how much better it can perform, for starters).
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