“Sentiment has picked up from the overly bearish levels of early 2016, triggering a moderate rebound recently,” the firm said in a recent research note.
When reviewing the patterns of the last few mini-cycles, a growth upturn supported by government mini-stimulus measures would typically provide a 15% to 20% market rally in a period of three months, the bank said.
The current situation is more similar to that of the middle of 2012, when there was rebounding growth and a recovering property market.
The bank expects CPI inflation to peak in the second quarter, while the average rate for 2016 is likely to be 1.9%.
“With economic growth picking up, we see some upside for cyclicals. However, since cyclicals have already logged considerable gains, we prefer sectors benefitting from improving demand/property sales (property and home appliances), and consumer sectors benefitting from higher but still-modest inflation.”
Improving consumer demand and property sales should benefit property and home appliances, while consumer sectors are expected to gain support from higher but still-modest inflation, the report said.
Shenzhen link
The firm believes that the Shenzhen-Hong Kong stock connect could be officially announced in the second quarter.
“Despite rich valuations, the Shenzhen market offers faster earnings growth and more non-SOEs, hence more choices for overseas investors who favour growth.”
In its base case for the second quarter, the firm believes that China’s growth and inflation are expected to pick up moderately, which, along with expectations for the Shenzhen-Hong Kong stock connect programme and the MSCI inclusion, will provide support to market sentiment and help sustain a gradual upward trend in A-shares.
Shanghai A-shares registered notable gains after the Shanghai-Hong Kong stock connect was launched in November 2014.
Source: FE Analytics
