Markets

Equities set to gain from low interest rates

By Chua Kong Ho (China Daily)
Updated: 2010-08-25 12:00

SHANGHAI - Chinese equities will benefit even as global growth slows because the central bank is likely to keep interest rates low and a weaker dollar will push investors to seek higher returns in emerging markets, said Citigroup Inc.

"The global economy seems to be entering an era of low interest rates and slow growth as the recovery loses steam," Minggao Shen, Hong Kong-based head of China research at Citigroup, wrote in a report. "Low interest rates in the United States could mean a weak dollar in the near term, which is traditionally positive for Chinese equities."

The nation's equities have tumbled this year, with the Shanghai Composite Index falling 20 percent, as concern about an overheating economy spurred the government to increase down payment requirements on home sales and order banks to set aside more deposits as reserves. Since reaching a low on July 5, the measure has rebounded 11 percent as investors speculated the government will ease tightening policies as growth slows.

China won't raise borrowing costs until the second half of next year, said Citigroup, jointly ranked second in Institutional Investor's inaugural All China research team poll this year. The central bank last increased interest rates in December 2007.

Citigroup raised its recommendation for Chinese property stocks and raw materials producers to "neutral" from "underweight", saying they will benefit from an extended period of low borrowing costs.

China slowdown

Related readings:  China's equities 'near the bottom': Citigroup  Insurers could invest more in equities  Europe debt crisis lures Henderson to China equities  China's stocks close higher - Aug 24

China's economy is cooling, with growth dipping to 10.3 percent in the second quarter from 11.9 percent in the first three months of the year. In the US, gross domestic product increased less than 1.5 percent in the second quarter, the slowest rate since the recovery began, according to the median forecast by economists in a Bloomberg survey. That's down from the 2.4 percent rate initially reported by the Commerce Department last month.

Economists surveyed by Bloomberg predict US government data will show that new-home sales, which account for less than a tenth of housing transactions, stayed at the second-lowest level on record last month.

The Dollar Index, which Intercontinental Exchange Inc uses to track the greenback against the currencies of six major trading partners, broke its longest string of weekly losses since 2004 on Aug 13. The yuan has risen 0.4 percent since the central bank dropped a two-year peg against the dollar on June 19.

Interest rates near zero risk fanning asset bubbles or propping up inefficient companies, Raghuram Rajan, former chief economist at the International Monetary Fund, and William White, former head of the Bank of International Settlements' monetary and economic department, said on Monday.

Bloomberg News