The key drivers behind China’s growth recovery are still largely intact.
Infrastructure spending in China has accelerated strongly since late last year and the policy-driven mini construction boom will likely last for at least two to three years.
Meanwhile, the real estate recovery is becoming more entrenched, and housing construction is gradually picking up. The tightening measures announced last month are a new headwind, but we doubt the impact will be dramatic.
Surprisingly strong export numbers in the January-February period may be exaggerated by reporting errors or seasonal factors, but the outlook for exporters is clearly improving, according to our global leading economic indicator.
Our China Investment Strategy maintains that the growth recovery will progress at a moderate pace and that policy tightening is not a major threat. A growth recovery without the risk of material policy tightening is a positive combination for stock prices. Improving growth should help corporate earnings, while plenty of liquidity bodes well for multiples expansion, both of which should lead to higher stock prices. Furthermore, Chinese stocks are still trading at deeply depressed valuation levels compared with their global peers as well as with historical averages.
Source: BCA Research
