Citigroup Inc is adding risk to its Asian portfolio on expectations of a recovery in the region's stock markets later this year, with China likely to be the "biggest winner."
The brokerage cut utility stocks to "underweight" and trimmed its "underweight" in property shares, according to a June 25 report by strategists led by Markus Rosgen. Chinese shares, previously the biggest "underweight," climbed in the brokerage's rankings, according to the report.
Stock markets will "continue to face headwinds until late summer" as analysts cut earnings estimates and domestic liquidity decelerates, Rosgen wrote. "Beyond these near-term negatives, we expect markets to recover, the catalysts being realistic expectations, attractive valuations and abating concerns about global growth."
The MSCI Asia excluding Japan Index tumbled as much as 16 percent from this year's high on April 15 as Europe's sovereign debt crisis raised concerns that the global economic recovery will sputter. The gauge is down 5.1 percent for 2010 and trades at 1.9 times book value, according to Bloomberg data.
Investors have an "interesting entry point" when valuations decline to 1.6 times book value, the Citigroup analysts wrote.
China's benchmark Shanghai Composite Index has declined 22 percent this year, the worst performer in Asia, as policy makers tightened monetary policy after record lending last year spurred a surge in property prices.
Recent wage increases in the country and a drop in the yuan's peg to the dollar will favor domestic consumption, according to the Citigroup report.