China’s Stock Market Set for Big Gains in 2011

Low valuations and lots of sidelined cash point to a rally in bank, energy and industrials.


Chinese stocks are poised to advance by nearly 40% in 2011,

according to Standard & Poor’s Equity Research (ERS)-Asia, amid

a broad market rally and a global economic recovery.


“On valuation grounds, China and Hong Kong markets are still

attractive in our view,” according to S&P ERS-Asia’s Hong

Kong/China 2011 outlook. S&P ERS-Asia says that a

combination of high levels of cash and attractive stock valuations

should boost the Shanghai Composite by 38.8% from January

3, 2011 levels to finish 2011 at 3,900.


Investors will likely reduce their holdings in bonds and take larger

positions in stocks in 2011, according to S&P ERS-Asia, which

notes that retail participation is still limited in the stock markets

but that liquidity is ample. “We expect that there is room for

equities to gain favor with investors particularly on rotation

out of fixed-income into stocks,” S&P ERS-Asia writes.


S&P Economics expects China’s gross domestic product to expand by

8.5% to 9% in 2011, down from its estimate of 9.7% to 10.2%

growth for 2010.


Sector Recommendations

On a sector-specific level, the energy and industrials sectors will

likely be leading the advance in 2011. S&P ERS-Asia recommends

an overweight position in the China energy sector. S&P expects

world oil consumption to grow by 1.7% in 2011 over 2010, much of

this stemming from strong growth from China and other emerging

markets, especially those not included in the Organization for

Economic Cooperation and Development (OECD).


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