China's stocks may rally 25 percent by the end of the year on higher earnings and the prospect a stronger yuan will allow for an earlier end to the tightening cycle, according to Goldman Sachs Group Inc's Timothy Moe.
"The risk reward is pretty good even though we may have to endure a little bit more uncertainty in terms of the policy tightening cycle," Moe, Hong Kong-based chief Asian strategist at Goldman Sachs, said on Bloomberg Television. A gain in the yuan means tightening is "closer to the end rather than to the beginning" and is a "powerful signal for people to become more constructive on equities on a broader basis," he said.
The nation's equities have fallen this year on concern an exit from government stimulus and measures to curb record property-price gains will hurt economic growth. The Shanghai Composite index has slumped 8.8 percent in 2010, the world's fifth-worst performer.
The CSI 300 Index, which tracks stocks on the Shanghai and Shenzhen exchanges, may slide to 2,900 points before reaching 4,000 by the end of the year, Moe said.
Shares on the CSI 300 trade at 18.2 times this year's estimated earnings, compared with 52 times at its record in October 2007, according to Bloomberg data.
Valuations have "compressed significantly" while companies are growing their profits "comfortably," Moe said.
Regional equity markets may benefit when China allows its currency to appreciate, according to Moe.
Yuan forwards headed for a weekly gain as central bankers in India and Brazil joined the International Monetary Fund and European Union in backing a stronger Chinese currency.