Shelter from the storm

2012 looks to be a year that will once again be plagued by economic uncertainty and market volatility. Investors must remain wary of the mother of tail risks, the disintegration of the euro zone. With political will falling far short of what is necessary to solve Europe’s structural problems, the potential for a severe outcome is undeniable.

Excluding this possibility, however, the Chinese economy appears resilient. While growth will undoubtedly slow in the coming year, most analysts expect Chinese GDP growth to remain at or above 8%. China has beaten the persistent inflation that dragged on economic prospects last year, and the country seems to have a fair chance of gradually adjusting to slowing growth with the help of fiscal stimulus.

In this environment, HSBC equity analysts are cautioning investors to look for reliable stocks of companies with steady earnings growth and balance sheets that could withstand a further credit crunch. Other promising candidates are companies that are likely to benefit from structural changes in demand – for example because of a strong brand or oligopoly position –or stocks that have fallen below their proper valuations due to ongoing weakness in the market, said HSBC.

Despite the challenging environment, analysts and investors seem to be recovering their optimism. The median estimate of analysts surveyed by Bloomberg is that the S&P will rebound by a modest 7.2% to 1,348 after remaining roughly flat in 2011. Investors have echoed this sentiment: In January, the American Association of Individual Investors’ weekly survey showed that nearly 50% of retail investors expected stocks to rise over the next six months.

With the global recession stretching out ahead, uncertainty may be becoming the “new normal” for investors. Perhaps American writer Richard Farina put it best: “Been down so long, it looks like up to me.”

Consumer

HSBC says: Belle (1880.HKG), Daphne(0210.HKG), Golden Eagle Retail Group(3308.HKG) to outperform

Chinese consumer stocks overall seem likely to be a mixed bag in 2012. Easing monetary conditions in China will help retailers, but they could easily be dragged down by weakening demand in the US and Europe. Some analysts interpreted the sharp drop in Chinese imports in December as a sign that the weaker global environment has finally begun to affect Chinese consumers. But some business types, notably luxury and franchises, are likely to be more resilient. HSBC equity analysts say shoe retailers Belle and Daphne should continue to see doubledigit revenue growth in 2012 due in part to network expansion. Department store operator Golden Eagle, meanwhile, will benefit from the resiliency of the luxury segment. Golden Eagle is more targeted to the high-end than competitors like Parkson and New World, and its high same-store sales rate stems largely from that economically resistant consumer base.

technology

CER Alpha says: Apple (AAPL.省略 (YOKU.NYSE) to underperform

After last year’s bubble in technology stocks, history suggests China’s pricey tech sector could underperform this year. The most resilient name in China’s consumer electronics continues to be Apple, due to its dominance in tablet devices and smartphones, its strong cash position and its roaring sales growth in China. (Apple has experienced such high demand in China that its new product releases are sometimes met with rioting.省略 is an attractive short. Its market capitalization of over US$2 billion will not cover the rising costs of bandwidth and content provision forever.

Commodities

CER Alpha says: Copper and aluminum to outperform

China’s copper imports hit record levels in December, and Alcoa has forecast that aluminum also stands to rise in 2012. Any play on these metals is a play on China – the country consumes 39% of the world’s copper and 45% of its aluminum. Both may see some near-term volatility: Copper will be affected if the primary property market continues to deteriorate, but copper prices are likely to rise on the whole in 2012, helped along by Chinese technology consumers and other demand. For aluminum, operators that are producing at a loss – estimated to be up to one-third of aluminum capacity in China – are expected to close this year, which should shrink supply and help drive up prices. That rising tide could lift the performance of China’s largest aluminum smelter, Aluminum Corp of China, more commonly called Chalco.

energy

Piper Jaffray says: Trina Solar (TSL.NYSE) and Yingli Green Energy (YGE.NASDAQ) to outperform; Suntech (STP.NYSE), Canadian Solar (CSIQ.NASDAQ) and LDK Solar (LDK. NYSE) to underperform

After bleeding money in 2011, the solar sector could see investor sentiment turn increasingly positive, Piper Jaffray said. Analysts saw a rebound of demand in Germany and the US before the end of the fourth quarter, when certain clean energy subsidies were scheduled to expire. With polysilicon prices up slightly, higher demand could help draw down module inventories. That would lead to improved working capital and utilization, which could benefit the companies come earnings time, said analysts. Piper Jaffray cautions investors to remain selective, with a focus on first-tier leaders with strong balance sheets and falling processing costs. The best performers are likely to be Trina Solar and Yingli Green Energy. Suntech and Canadian Solar seem likely to underperform due to their low margin structures, while LDK Solar’s performance will be dragged down by its US$3 billion in net debt.

Property

DTZ says: SOHO China (0410.HKG), Evergrande Real Estate (3333.HKG), Kerry Properties (0683.HKG) and Sun Hung Kai Properties (0016.HKG) to outperform

Many analysts expect China’s tight real estate restrictions to be relaxed this year, which would undoubtedly trigger a rebound in stock price. The timing of any such policy change remains uncertain, however, and in the meantime property companies will be squeezed by falling transaction volumes and tightener liquidity. Property consultancy DTZ counsels investors to look into office and industrial property, which will see more rental price growth in 2012 than commercial and residential property. With mixed residential and small offices property, SOHO China should fare slightly better than its competitors, while Evergrande Real Estate, Kerry Properties and Sun Hung Kai Properties are also likely to perform better due to a focus on office space, DTZ said.

a-Shares markets

CER Alpha says: A50 China ETF (2823.HKG) to outperform

Shanghai stock indices could be set for a rise to wipe out a two-year loss of 33%. Several signs point toward an improving picture for Chinese equities in 2012, most notably monetary easing and the return of pro-growth policies. Beijing continues to expand the Qualified Foreign Institutional Investor program (QFII), which allows large foreign investors to purchase A-share stocks. Investors unable to get direct exposure through this program might consider Hong Kong’s A50 China ETF (2823.HKG), which trades at a slight premium to the Shanghai index that it tracks.