The macro picture in China has improved in the following ways: (i) there has been a surprisingly sharp and recently broad rise in both Tier 1 property prices and housing turnover; (ii) a surge in infrastructure investment; (iii) a
shortage of inventory, with PMI new orders less inventory implying a further pick-up in IP growth; (iv) a stabilisation in FX reserves; and (v) signs of reform.
Investment conclusions: We see four China-related buys: (1) We upgrade luxury from underweight to overweight owing to compelling valuation on Credit Suisse HOLT®, especially for a non-disrupted sector; revenue growth
expectations have fallen to realistic levels; and European luxury stocks have significantly decoupled from Macau casino stocks. Focus on LVMH. (2) Non- China-related GEM exposure (Experian, Sanofi, Imperial). (3) Shanghai A
(excess liquidity is extreme) – Alibaba, Tencent. (4) Cement (the prospect of fiscal QE, construction at 20-year lows as a percentage of GDP in Europe, corporate change, good earnings momentum) – LafargeHolcim.
We stay underweight: German autos (a 'perfect storm' of negatives); Chinarelated capital goods (Sandvik, SKF); bulk chemicals (BASF) and Chinarelated competitive threat plays (which have outperformed relative to the
RmB). The following stocks are priced for premium CFROI® to their historical norms: Nabtesco and Vestas Windsystems. We remain underweight mining (having reduced to underweight in March) but acknowledge a more positive story on steel and zinc (and thus reduce the size of the underweight). The fundamental problem, however, is that a large number of indicators suggest industrial commodity prices should fall.
Full note attached