Investors should lower their holdings in China stocks, Asia’s best performers in the last three months, and instead buy Taiwanese shares, UBS AG said.
China was cut to “neutral” from “overweight” by Niall MacLeod, a Hong Kong-based strategist at UBS, as the market will “take a breather” after rallying since November. Taiwan was raised to “overweight” from “underweight” because technology shares may start to outperform, the strategist said.
China’s Shanghai Composite Index has surged 17 percent in three months, while the Hang Seng China Enterprises Index, which tracks so-called H shares traded in Hong Kong, has gained 8.4 percent.
The MSCI Asia-Pacific Index was little changed during the period, while Taiwan’s Taiex index rose 2.1 percent.
“In recent weeks, it looks like leading indicators may be bottoming,” MacLeod wrote a report yesterday. “Historically, Asian cyclicals have typically performed relatively well when leading economic indicators start to turn from their lows.”
Stocks in China and in Hong Kong have rallied from their lows on speculation that government spending will bolster economic growth.
The Shanghai Composite has surged 29 percent since the package was announced on Nov. 9.
China’s economy may expand 6.6 percent in the second quarter, according to the median estimate of 14 economists surveyed by Bloomberg News.
That’s faster than the 6.3 percent growth in the previous three months, the weakest pace since 1999, signaling that the stimulus package is taking effect.
“China looks set to be the first major economy to recover from the current global meltdown,” said Lu Ting (陸挺), an economist with Merrill Lynch & Co in Hong Kong. “China is the only economy in the world to see significant growth in credit to corporate and household sectors after September 2008, when the financial crisis worsened to a near-collapse.”
UBS said yesterday that it removed China Mobile Ltd (中國移動通信), the world’s largest wireless-phone company by users, and China Resources Power Holdings Co (華潤電力控股), the third-largest Hong Kong-listed Chinese generator by market value, from its list of recommended stocks.
“We have liked China due to the reflationary potential in that country,” the strategist said. “But this seems well understood now.”
The strategists raised technology shares to “overweight” from “underweight” as inventory levels fall and the slump in demand starts to slow, UBS said yesterday. That boosted the outlook for Taiwan, whose TAIEX gets about 45 percent of its weighting from technology, the strategist said.
The brokerage raised its rating on United Microelectronics Corp (聯電), the world’s second-largest custom chipmaker, as well as chip testers Advanced Semiconductor Engineering Inc (日月光半導體) and Siliconware Precision Industries Co (矽品精密).
“Technology has lagged the other sectors in the cyclical space,” the strategist wrote. “Valuations in a relative sense compared to history look better and the global industrial production nature of the pro-cyclical story is more ‘playable’ in Asian tech than other cyclical sectors.”
Asian utilities and telecoms were cut to “underweight,” MacLeod wrote, saying that so-called defensive stocks are likely to lag behind.