| HONG KONG
HONG KONG Chinese stocks will likely keep leading declines in Asia's emerging markets through the first half of the year, with investors fearing policymakers will only get more aggressive as they try to prevent asset bubbles.
Most fund managers with China in their portfolio still believe rising domestic consumption in the world's fastest growing economy is a long-term bet worth making.
But recent central bank moves to curb bank lending and crack down on property speculation have foreign investors bracing for even more measures, leaving them prone to take profits on any market bounces and reluctant to hunt for bargains just yet.
Chinese urban property prices rose at the fastest annual rate since October 2007 and new lending surged in January, data showed on Thursday, suggesting officials will have to keep tightening the policy screws.
Beijing's moves to staunch excessive credit and keep the economy from overheating have pushed the Shanghai .SSEC and Hong Kong .HSI indexes down more than 10 percent from last November and weighed heavily on stocks in the rest of Asia and around the world. China has helped lead the global economic recovery as demand in the West remains stubbornly weak.
"We think the market is about half way through a correction so it's a little early to be looking for value," said Mark Konyn, Asia Pacific chief executive of RCM, a unit of Allianz Global Investors, in Hong Kong.
The most popular play on China's domestic growth, buying shares of banks and insurers, has been squeezed because of the policy shift to tighten liquidity, said Konyn, who oversees some $11 billion in assets.
Investors are likely to take time searching for opportunities in less familiar sectors such as retail and healthcare.
FEWER EARNINGS REVISIONS
China-focused equity funds have seen redemptions for five of the last six weeks, according to EPFR Global. Meanwhile, the rolling 60-day percentage change of the Hang Seng mainland composite index .HSCE is a woeful -16 percent compared with -6 percent on the MSCI Asia Pacific index ex-Japan.
In addition to unease about policy changes, analysts are finding fewer reason to upgrade their company earnings forecasts, putting valuations under tougher scrutiny.
The three-month change in 12-month forward earnings forecasts of the MSCI China stocks index has dropped to 1.1 percent from 6.6 percent in October 2009, Thomson Reuters I/B/E/S showed.
That is the biggest change in the momentum of earnings revisions among the developing BRIC countries of Brazil, Russia, India and China.
The MSCI China index is trading at a multiple of 12.6 times expected earnings a year from now, after valuations shrank in January by the most since September. But China is still more expensive than Brazil or Russia.
With expected Chinese corporate earnings growth this year on the order of 20 percent, a multiple of 12.6 times is not that bad, said Richard Wong, who manages a $3.5 billion portfolio of Chinese stocks for Halbis, a part of HSBC Global Asset Management in Hong Kong.
His top 10 holdings include Bank of China (3988.HK) and Tencent Holdings (0700.HK), China's largest Internet firm by market value.
However, Wong is not chasing infrastructure stocks at this point because he believes Beijing will scale back investment in new projects. Wong is also underweight the property sector, which he bets will bear the brunt of further Chinese tightening measures at a time when new developments are underway.
"Policy headwinds and more supply on the housing side are negatives for the property sector," said Wong.
For now, mainland developers have enough cash to take them comfortably through the long Lunar New Year holidays this month, but if property sales keep declining, they may need to cut prices to lure buyers and maintain enough cash flow, Wong said.
AN EITHER/OR MARKET
JPMorgan Asset Management's Greater China fund managers, who oversee $10.3 billion in assets as of 2009, are more sanguine on real estate and even include tourism and property development firm Shenzhen Overseas Chinese Town Holding (000069.SZ) among the top holdings in their A-share fund.
But they too are expecting a volatile year, warning that waves of profit taking could be triggered as the People's Bank of China, the central bank, gradually unwinds monetary stimulus adopted during the global financial crisis.
"Policy exits by the PBOC will either be met with a vote of confidence or a sharp sell off, similar to what we are currently experiencing in the Shanghai and Shenzhen markets," the fund managers said in a note to clients.
Vincent Chan, head of China research for Credit Suisse in Hong Kong, also expects 2010 to be a bumpy year, with the risk that Chinese policy changes could come suddenly.
Chan is forecasting the Shanghai A-share index .SSEC will finish the year at 3,300, implyings gains of 10 percent from current levels. But that depends on a second-half rebound.
He expects consumer-related stocks to gain and banks, energy and telecom stocks to decline as part of gradual portfolio reallocations.
Government policy will be the main driver for the market, though.
If the economy starts to show signs of some slowing in the first half of the year because of lending curbs and easing investment, then the pace of policy tightening may slow.
"Then probably you will have a better market in the second half of the year," Chan said.
(Additional reporting by Lee Chyen-Yee)
(Editing by Kim Coghill)