A REBOUND among Chinese stocks listed in Hong Kong may falter because some shares are expensive and inflation concerns haven't receded, JPMorgan Chase & Co said yesterday.
Investors should be wary on Chinese equities "in the near term" because of high food and energy prices, slower gains in the currency and high valuations among the largest stocks, JPMorgan analysts led by Frank Gong said in a report.
The Hang Seng China Enterprises Index, which tracks the H shares of 42 Chinese mainland companies, has rallied 30 percent from a nine-month low set on March 20. According to Bloomberg News, the MSCI China Index gained 28 percent during the period.
"In the near term, the MSCI China Index may have limited upside," the analysts wrote in yesterday's report.
Gong's team, voted the best China researchers by Institutional Investor magazine's fund manager survey this year, remain "bullish" on Hong Kong-listed Chinese stocks in the next six to 18 months as concerns ease that economic expansion and profit growth will slow.
They forecast the Hang Seng China Enterprises may end the year at 18,500, a 29-percent gain from yesterday's close, while the MSCI China Index may climb 26 percent in the same period.
JPMorgan's analysts favor infrastructure shares such as Anhui Conch Cement Co, China's biggest producer of the building material, and consumer-related stocks including Tsingtao Brewery Co. Telecommunications shares may lag behind other stocks because they are among the most expensive in China, the analysts said. A measure of phone companies on the MSCI China index is valued at 20 times estimated earnings, compared with 16 times for the broader index, according to data compiled by Bloomberg.
China Mobile Ltd has climbed 28 percent from a six-month low reached on March 17, after more than doubling last year. It trades at 21 times earnings.
"The telecom sector is not as cheap as it was several months ago and the current valuation suggests that tactically shifting some exposure away from the sector in the short term may be necessary," the analysts said.
Gains among energy stocks may be capped because inflation concerns may delay changes to government controls that restrict companies from passing on record-high oil prices onto consumers.
The Hong Kong shares of China Petroleum & Chemical Corp and PetroChina Co, the nation's two largest refiners, have this year lost 38 percent and 20 percent respectively on concern the companies won't be able to recoup their costs.