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  Red Chip Trend
Expecting the Unexpected 
Year 2010 ended in a relatively humble style. To some investors in the equity market, it was a lackluster year. However, that does not stop me from staying positive on the market outlook in 2011.
It is crystal clear that tightening policies from China, such as higher required reserve rates as well as interest rate hikes, have become the major force behind the recent bear run. By the same token, I believe both the A-share and Hong Kong stock markets have largely priced in such factor. In fact, tightening policy in China is anything but new in recent history. The more important thing is sustainable earnings prospects driven by robust economic growth. Inflationary pressure would be inevitable given China's high GDP growth but it will be crucial to manage more sensitive areas such as foods. Globally, the US economy should still be on the recovery track, though slowly, and the quantitative easing is likely to continue, if not expanding further. Europe remains a trouble maker as it stays in "intensive care room".
From a fundamental point of view, earnings growth in 2011 is likely to stand at high-teens, slightly lower than 2010 but still respectful. Valuation looks attractive amidst the forward Price Earnings Ratio (PER) falls below historical average and far behind the bull-market level. Besides, H-share and red-chips should also benefit from Renminbi (RMB) appreciation expectation and improving outlook for the A-share market. We identify a few investment main themes, including the more familiar 12th five-year plan related topics (industrial structure upgrade, increasing consumption, urbanization etc.), RMB appreciation beneficiaries, off-shore RMB business and relevant products.
In terms of sector selection, we would like to focus more on heavy machinery, construction material, consumer, plus selected cyclical sectors like oil, aviation, and shipping.
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Mr Peter Pak, Executive Director
BOCI Research Limited |
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