China may witness the worst deflation in a decade, with the consumer price index (CPI), a key indicator for inflation, falling to negative one percent in February, Deutsche Bank's chief economist for Greater China Ma Jun said on Jan 13.
"Our research team forecasts that CPI will likely fall below minus 1 percent in February and producer price index (PPI) could decline to minus 7 percent in the third quarter of this year," he said.
"We forecast that China's GDP growth will decelerate further from 9 percent in 2008 to 7 percent in 2009 on significantly weaker external demand and rapid deceleration in investments in the real estate, manufacturing and mining sectors," he said, adding China's GDP will have a "double dip", finally reaching its low point in the first half of 2010.
The bank predicted that the average earnings per share (EPS) for Hong Kong-listed H shares will likely decline by 10 to 15 percent in 2009. And the A-share index would also be heading lower before stabilizing in the second half being more positive.
Deutsche Bank highlighted several themes which could provide investment opportunities during 2009:
Counter-cyclical sectors: healthcare, education, and online gaming could demonstrate significant resilience to the economic slowdown
Government-sponsored investment related stocks: cement and railway construction
Ongoing industrial consolidation: steel, non-ferrous, and property companies
The effect of deflation is expected to be negative for many sectors of the economy. But some sectors, including food & beverage, power producers, and oil refining companies could benefit from lower cost of materials.