The Hong Kong stock market recorded favourable returns in the past three years of the rat (1972, 1984 and 1996), and Credit Suisse analysts say the upcoming year of the rat in 2008 could be an equally versatile and volatile year for equity investors, amid rising inflation.
In a recently published report entitled “How to Spend Your Lai See”, Credit Suisse analysts have picked eight small caps in the region with average potential upside of 71% by their estimates over the next 12 months. The report suggested that investors could consider growing their Lai See money, which is usually a small amount, by focusing on small-cap stocks.
The picks come from different sectors in different markets: China property and consumer; Hong Kong industrials; Indonesian platation; Korea technology; Malaysia conglomerate; Singaopre water play; and Thailand construction.
“Undemanding valuations are a prerequisite for a small cap stock to perform. The eight stock picks stand out not only because of their fundamentals, but also their compelling valuations with 2008 P/E estimates ranging from six to 26 times,” says Kenny Lau, head of Small-Cap Research, Credit Suisse, non Japan Asia.
In China, solid GDP and corporate earnings growth, abundance of liquidity, as well as renminbi appreciation will continue to support the performance of Chinese stocks. However, Credit Suisse cautions against rising inflation, the high valuation of some A-shares and an uncertain global environment.
“It is likely that the volatility of the market in 2008 will be comparable to that of 2007, but the chance of significant absolute returns is rather remote,” says Vincent Chan, head of China Research, Credit Suisse. He favours sectors that are geared more towards Chinese consumption.
“The market looks fairly attractive after the recent sell-off. If we assume that the yield gap between Hang Seng Index earnings and the US 10-year Treasury returns to the historial average of 260 basis points, our index target is 27,100,” adds Clifford Lam, head of Hong Kong Research, Credit Suisse.