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Analyst: Inflation expectations benefit stocks

By Ding Qi (chinadaily.com.cn)
Updated: 2009-06-05 17:24

Although surging prices are not good for the economy, inflation expectations can drive up asset prices and boost stocks in the Chinese market, a senior investment banker told the official China Securities Journal on Thursday.

According to Frank Gong, JP Morgan's China chief economist, financial authorities worldwide are now taking various measures against economic recession and deflation. But these moves, if not well managed, could incur inflation risks in the future.

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The European Central Bank decided on Thursday to keep its key interest rates on hold at 1.0 percent and planned to buy 60 billion euros in bonds next month to pump more liquidity into the market. Analysts said Europe is following the quantitative easing policies of the US by air dropping funds to prevent the economy from shrinking further.

In the coming years, the risk of inflation will be larger than that of deflation but is not posing a real threat at present, Gong said.

According to him, inflation expectations can help to boost consumption and investment, and therefore propel the entire economy. However, once inflation has become a real threat, the capital market and even the whole economy will probably take a beating.

Boosted by the nation's $586 billion stimulus package and recovery signs of the economy, Chinese stock markets have rallied about 50 percent since the beginning of the year. Meanwhile, domestic commodity prices have also staged a bullish run so far based on recovery hopes and restocking needs, as well as the weakening dollar.

Gong recommended the real estate and resource sectors as ideal investment targets to hedge off inflation in the long run, although he expected a correction in both stocks and commodities in the second half of this year.

He suggested domestic investors closely follow the development of the US economy, which the whole world currently has high hopes in. If the US economy doesn't show substantial recovery in the second half, there will probably be a major setback in the global stock markets, and mainland-listed A shares will be no exception, Gong said.