Fund managers who called China stock bottom see more gains ahead

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Chinese shares, MSCI China Index,  Deutsche Bank Wealth Management, Asia ex Japan equities
China’s A shares will lead an advance among Asia ex-Japan equities this year, the two money managers say. (Reuters)

At the end of October, when Chinese shares were in freefall, the chief investment officers at Deutsche Bank Wealth Management made a bold call: the worst was over for the world’s second-largest equity market. Since the start of November, the MSCI China Index of the nation’s shares has rebounded more than 7 percent.

For Christian Nolting, global chief investment officer, and Tuan Huynh, chief investment officer for Asia-Pacific, those gains are just the start. China’s A shares will lead an advance among Asia ex-Japan equities this year, the two money managers say. While they declined to give a specific target for Chinese stocks, they expect the regional ex-Japan gauge to climb almost 5 percent more in 2019.

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Here are their reasons for optimism:

Asian shares tend to bounce back after bad years, they say. There’s truth to this pronouncement. The MSCI Asia Ex-Japan Index, which plunged 16 percent in 2018, hasn’t posted back-to-back annual declines since 2002. The Chinese government is likely to add more stimulus to the economy, according to Nolting and Tuan. That’s already happening. Since the start of this year, China has announced a flurry of tax cuts, credit policy tweaks, looser property measures and record injections via open-market operations. Earnings growth at Chinese companies is likely to be in the high single digits or low double digits, they say. And concerns about China’s economic slowdown, in their eyes, may be somewhat overdone. They expect the government to take steps to ensure that gross domestic product growth doesn’t fall below 6 percent.

China is “one of our most preferred calls,” Tuan said in an interview in Singapore. Equity markets including China priced in an earnings recession in 2018 that just didn’t exist, he said.

The money managers, which help oversee $336 billion at Deutsche Bank Wealth globally, issued their call on Chinese shares in a CIO note to clients on Oct. 25, according to the company. They turned bullish on U.S. equities in December, just before the S&P 500 Index started its climb this year. The U.S. benchmark stock gauge was up 5.2 percent already in 2019 through Thursday’s close, and Nolting and Tuan predict it will advance to 2,850 by year-end, which implies a gain of more than 8 percent from Thursday’s close.

Deutsche Bank Wealth likes infrastructure stocks in most markets as governments are more likely to provide stimulus in 2019 than central banks, which are raising interest rates and reducing their balance sheets, according to Nolting and Tuan. It also likes consumer-discretionary shares in Asia, which it says will benefit from the region’s burgeoning middle-class.

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