LGT, Europe’s largest family-owned private banking and asset management group, recommends a buy on Chinese equities, especially A shares, for a second year as its expects more monetary easing policies and attractive returns from the market.
“We still believe that fund managers are still underweight Chinese equities,” said Stephen Corry, head of investment strategy at LGT Asia Pacific.
The low equity valuation is mainly due to concerns by global investors that the Chinese economy is headed for a hard landing and more companies are at risk of defaulting on their loans. But none of these are likely to happen, Corry said.
Last year, LGT also recommended Chinese equities, bucking the prevailing market trend.
He said China is likely to roll out more monetary easing measures to correct the capital misallocation in the private and state-owned sectors.
“The interest rates in China are too tight currently for any economic potential,” Corry said. “I expect the [People's Bank of China] to cut interest rates again until it could support an economic growth rate of about 7 percent.”
Once monetary stimulus is launched, A shares will benefit more than H shares, he noted.
On debt default risks, Corry said the problem is basically “inter-governmental” as most of the borrowers are government financial vehicles while the lenders are state-owned banks.
“As long as you believe the Chinese government is standing behind some of these debts, I actually do not think the debt issue is as bad as how it looks to some.”
Two other contrarian positions investors should consider for 2015 are European, particularly German, equities and senior loans.
EU equities are expected to move sharply higher if European Central Bank president Mario Draghi rolls out a full-blown quantitive easing in 2015, Corry said.
And of all the EU equity markets, the German DAX index appears to be of particularly good value, he said.
Given growing deflation fears among fund managers, investors could seek an exposure to inflation trades and senior loans in particular, LGT said.
Overall, the group prefers stocks over bonds for 2015. Corry said there is no evidence that global equity markets are in a euphoric state despite sizable market gains in the United States, China and India.
In terms of sectors, LGT recommends stocks related to information technology.
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