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ABN AMRO Bank bullish on China, Hong Kong

Published on Thu, Feb 05, 2009 at 10:18 | Source : CNBC-TV18

Updated at Fri, Feb 06, 2009 at 11:43

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Daphne Roth, Head-Equity Research Asia of ABN AMRO Bank, believes that the bottom for markets is building and that markets won't see a new high till the sentiment of risk aversion remains. She is of the view that China will do better than the rest of Asia. Besides China, Roth is overweight on Hong Kong given both governments' stimuli plans.

Roth said markets are looking at the USA for any leads.

Here is a verbatim transcript of the exclusive interview with Daphne Roth on CNBC-TV18. Also watch the accompanying video.

Q: What kind of path are you plotting for equity markets over the next few months? Do you sense that there might be a retest of the October lows and more pressure or do you think things have sort of bottomed out right now?

A: Going forward, in the next couple of months, markets are still going to be very volatile. I still expect the bottom or the base to be building. So, I don't rule out that we may test the October lows, the reason is, of course, that first quarter '09 earnings will be coming out from the US and it is going to be bad still. Of course, for Japan, year ends in March and we have already heard quite a lot of negative news from Japan. So that is going to be bad too. Thus, that will weigh on the market. As long as risk aversions remain very high, the market will not do well.

Q: We are hearing some news from China this morning which has lifted the metals pack, which has lifted shipping--the Baltic Dry Index considerably. Do you think any kind of Chinese stimulus might lead to a recovery in the region, in the beaten down shipping indices and in beaten down metals?

A: It certainly helps. China is doing all its bet to help the economy to recover so we have heard lots of news concerning its fiscal stimulus--the USD 580 billion - to be spent over the next two years and more clarity is coming out of that. Moreover, it is also cutting rates very aggressively--216 bps so far reversing much of the tightening that we have seen in '06-'07. We are seeing specific action coming out of that. So, I think China would do better than the rest of Asia; subsequently, we are overweighting China and Hong Kong. I think China's growth will certainly help to cushion Asian growth here but it is just too small to help the global market. I think the market is still looking at the US for any lead in that.

Q: Would you go as far to say that China as a market is looking more promising than the Indian market because both those markets led the slide in 2008? How do they two look relatively in your eyes?

A: I don't really look at India, but because of the very centralized government in China, and the fact that it has a lot of forex surplus, it is able to engage in much more bigger fiscal stimulus. We have heard a lot of noise coming out of the central government in China. Consequently, China should do better than India in that sense.

Some of the markets that we like is because they emphasize on rural development, they emphasize on the housing market and also infrastructure. So we prefer certain stocks like China Communications Construction, we like that space and falling energy prices also means that some of the integrated oil like Chinese National Oil Company (CNOC) and PetroChina should do well. So they should be reporting some refining profits instead of subsidized losses, and of course, we like China Mobile which is still very defensive. We like cash rich companies. Thus, China should do better and should help Asia to come out of this recession later in the year.

Q: In the nearer-term though, do you sense that all this talk and pointing towards large scale stimulus from China can actually cause some kind of recovery in Asian markets different from what is happening in the US? Do you sense a differentiation in performance because even last month the MSCI emerging market Asia index was actually a far better performer than what happened with developed markets?

A: I believe so. I think it definitely have been influenced because China is quite a big consumer in some of the raw material. So it would definitely help to boost confidence, for example, in Australia as we go through this iron ore price negotiation, coal price negotiation that will help some of those markets, and of course, Asia increasingly is trading with China. So it will boost some of the sentiment over here. Thus, China is still a very important market for Asia.

Having said that, I think, as long as risk aversion remains very high, I do not rule out that the US market might do better because of risk aversion. So we might still see capital coming out of the emerging market and that will reduce some of the outperformance in emerging market. As a result, we are still overweight the US market, we have a neutral weight on emerging market including emerging market Asia.

Q: How would you approach commodity derivative stocks now with specific reference to metal stocks?

A: We still have an underweight in commodities; the main reason, of course, is because of the global slowdown. That means that we will still see quite a lot of demand destruction. The only space within the commodities that we have a neutral weighting is energy because it has come down so much. However, for base metals we are still slightly cautious because of the demand side.