Goldman Sachs is rounding out their commodity bullishness with an upgrade of Chinese equities this morning. They cite an easing in policy tightening and a supportive economic backdrop as the primary reasons for the upgrade. Via Goldman Sachs & Business Insider:
“In early December, we estimated 2Q as the potential turning point for China, and we have wrestled with the timing of our upgrade for the last few weeks. With our sector upgrades in banks and property, we argued that it was better to be early than late, but in extensive conversations with clients, this is harder to do in practice than in research. Since most funds have little to no performance cushion, we have tried to delay our upgrade as long as possible so clients take as little risk as possible. For the last four months, the HSCEI has underperformed MXAPJ by 4-10%, and traded between 12,000 and 13,000. With this note, we feel the risk/reward is in favor of upgrading, subject to the caveats above.”
They highlight three worries that are now easing:
- Quarterly growth path: slower now, better later. Activity indicators, surveys and our proprietary indicators suggest that economic growth has responded more quickly to policy tightening than we previously expected. As a result, we have lowered 1Q sequential growth (to 10% from 11%), but raised sequential growth rates for 2Q-4Q compared to our previous forecasts. 2Q is still likely to be the softest quarter (8.8%) and our full year GDP forecasts are unchanged at 10%.
- Less inflation pressure. We expect CPI to reach around 5% in 1Q11 and 2Q11, then attenuate to below the desired 4% threshold by 4Q11. Importantly, inflationary pressures have been moderating in sequential terms since December 2010 (when they peaked at 8%), and recent evidence of slower activity growth suggests that upside risks have reduced.
- Less policy tightening. Given the recent data, policy makers may adopt a less aggressive stance. We expect only one 25bp rate increase in 2Q, fewer reserve ratio requirement increases, a moderate easing in loan quotas, and a pick-up in fiscal expenditure and investment project approval toward midyear. This is not yet equivalent to a shift from an anti-inflation to a pro-growth stance, but the change in policy appears to be towards the softer side of the spectrum.
Source: Goldman Sachs, Business Insider
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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