德意志银行--China: Themes and Strategy for 2011

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关键词：Strategy Strateg Themes 德意志银行 Theme Strategy China 德意志银行 Themes

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概要：
Inflation will likely be the most important macro driver for market performance in 2011. High inflation in 1H tends to depress the market as it generates fear and uncertainty over policy tightening. An easing of inflation near the middle of the year should justify a market rerating. The key risk to this outlook is government failure to implement aggressive anti-inflation measures at the beginning of the year.
We are overweight in sectors that benefit from major structural changes. These beneficiaries include 2nd- and 3rd-tier city developers, tourism, IT services, property agencies, equipment, new energy and cement, as well as local retailers and banks with major exposure to inland growth.

15% upside to MSCI China in 2011
Our end-2011 MSCI China index target implies a 15% upside in the coming 12 months.
This based on our expectation of 15% EPS growth in 2011 and unchanged market
valuation at the year-end.
1H inflation and 2H disinflation should drive market dynamics
The inflation trajectory in 2011 will likely be the most important macro driver for market
performance. We raise our annual CPI inflation forecast to 4.4% from 4.1%, and our
policy rate expectation to another three hikes totaling 75bps. We expect inflation to
stay uncomfortably high during most of 1H (to peak at 5.5%yoy in 2Q), but it will likely
decline towards 3-4% in 2H. High inflation in 1H tends to depress the market as it
generates fear and uncertainty over policy tightening. An easing of inflation near the
middle of the year should justify a market rerating as policy uncertainties are removed.
Key risks to this outlook include government failure to tighten policy aggressively at the
beginning of the year, worsening weather conditions, a surge in global commodity
prices, and an increase in money velocity.
Sector rotation on change in inflation profile
Our sector preference for the year should change according to the inflation profile.
During periods in 1H when inflation remains high and even rises, we will prefer sectors
that are less vulnerable to credit tightening, rate hikes and price intervention. In
particular, we prefer large banks, insurance, commercial properties, retailing,
equipment, IT services and tourism. We will be cautious on IPPs, coal, smaller banks,
oil and gas, and highly leveraged developers. When inflation begins to abate, which we
expect to start in the middle of 2011, the victims of inflation should begin to
outperform the market.
Sector strategy for the year as a whole
For the year as a whole, we are overweight in sectors that should benefit from major
structural changes. These beneficiaries include 2nd- and 3rd-tier city developers, tourism,
IT services, property agencies, equipment, new energy and cement, as well as local
retailers and banks with major exposure to inland growth.
Six structural themes
We highlight six major structural themes: 1) financial reforms will likely depress the EPS
growth of mid-sized banks; 2) the public housing program, which will likely grow more
than 100% in 2011, should support cement, but challenge developers in the mid-end
market; 3) the equipment sector will likely outperform the rest of manufacturing; 4)
services will likely outperform manufacturing; 5) smart grid equipment, wastewater
treatment and waste recycling will likely present growth opportunities arising from the
government’s effort to promote energy saving and environmental protection; and 6)
inland provinces will likely enjoy significant outperformance over the coastal provinces
in real estate, retail, banking and raw material demand growth.