Prepare for a lucky, yet tricky bunny year

Despite promising growth in the market, investors need to be as agile as hares to have a fruitful rabbit year, says Credit Suisse.

It's time for the Year of the Rabbit -- a zodiac sign representing luck, nimbleness and mischievousness. When the little herbivorous mammal emerges from his burrow on February 3 and greets us with “kung hei fat choi” while chewing on a carrot, an auspicious yet tricky new lunar year starts.

Under the magic spell of the active bunny, the stock markets in China and Hong Kong will embrace 20% plus solid growth, supported by promising earnings, but the two economies will continue to be distracted by excessive liquidity fuelling the asset bubble and inflation, Credit Suisse said yesterday in its annual report on how to spend your lai see.

Therefore, investors need to be as agile as hares, in other words, they need to be mentally equipped with long ears and muscular hind legs in order to detect the potential gain and meanwhile run away from losses, according to the bank. A very tricky year for investors indeed.

The bank estimates that there will be 25% growth in the A-share, H-share and MSCI China markets thanks to promising earning prospects, while Hong Kong's Hang Seng Index (HSI) may gain 22% and Hong Kong property prices may surge another 30% from now until the end of 2011. The prediction seems in line with astrologers' belief that stock prices tend to rise in bunny years, since the rabbit is the luckiest sign in the Chinese calendar.

However, the previous three rabbit years show a mixed picture. The HSI recorded overwhelming growth of more than 75% in 1975; but 1987 was the year of the Hong Kong stock market crash. And although 1999 saw a strong rally in the HSI, this was notable for being a rebound following the Asian financial crisis.  

In 2011, inflation is the biggest risk for China as the country is likely to record 9.3% GDP growth for the year, according to Credit Suisse.

“That looks like a slowdown compared with last year’s 10.3%. However, for China, a slowdown in GDP is not a problem, inflation is,” said Dong Tao, a regional economist at the bank.

Tao thinks China’s inflation, which is likely to reach 6% by the middle of 2011, will expand from food prices to service costs. The reason is that country will suffer a severe labour shortage as "more jobs will be available in central and western China, booming infrastructure projects need workers, and people are generally reluctant to move to coastline cities where living costs are much higher than in the hinterland”.

Chinese migrant workers received an average 14% wage increase last year and their pay will grow by 20% to 30% in the coming years, according to Tao.

Likewise, inflation of both consumer and asset prices will be a key theme for Hong Kong in 2011.
Hong Kong is surrounded by the monetary policies of the US and China, which are not really adaptable to its own economy; the city is soaked in excessive liquidity, yet, real interest rates are close to zero percent, which will inevitably send housing prices higher, the bank said.

The growing asset inflation will also create even more social tension internally as the distribution of wealth has already become polarised, it added.

Hong Kong people, especially children and the unmarried who traditionally receive lai see during the Chinese New Year, will feel the pinch of inflation as the money they receive will shrink in real terms.

However, Credit Suisse gave investors a tip of how to make their lai see more generous, naming eight stocks with an average upside potential of 36% during the next 12 months, namely AMVIG, Great Eagle, Kaisa, Midland Realty, Peak Sport, Skyworth, Sparkle Roll and Texhong.

That said, since the market will be as tricky as the bunny, investors are advised to look before they leap.

Photo provided by AFP.

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