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Merrill expects 'bumps' ahead, but future bright

By Wang Lan (China Daily)
Updated: 2008-10-15 11:23

Merrill Lynch, the beleaguered US investment bank that Bank of America recently took over, yesterday said it is facing "temporary bumps" in its investments in China, although it remained confident in the longer-term prospects for the Chinese economy.

"For the short term, the Chinese equity and property markets look bad, but after the 'bump in the road', the future will be bright," Erh-fei Liu, China chairman of Merrill Lynch Asia, said yesterday in a news briefing at the Merrill Lynch China Investment Summit.

Despite his confidence, Liu said the economy of China is not big enough to pull the rest of the world out of a global recession.

"As the US economy is five times that of China's, if it goes into a recession with GDP growth dropping by 2 percent a year, China will need to grow an additional 10 percent to offset the impact, but that does not work mathematically," Liu said.

David Cui, head of China equity research & strategy of Merrill Lynch, said the correction in the domestic property market and slowing export growth as a result of falling world demand would combine to blunt China's growth momentum, as property investment and exports had been the two engines of China's GDP growth over the past several years.

"Although total merchandise exports accounted for only 9 percent of China's GDP, a lot of the capital formation in China is related to external trade," Cui said. "Even some part of consumption is export-related," he said, adding that Chinese people in the coastal regions consumed the most, because of the money they made in exports.

Summarizing Merrill Lynch's investment strategy in China, Cui said it was to "be very picky in choosing sectors and stocks".

He recommended investors to focus on "defensive" stocks in consumer sectors. The stocks he strongly urged investors to avoid are those in the financial and property sectors.

Cui also warned investors to stay away from the stocks of highly leveraged enterprises, particularly small cap stocks, no matter how cheap they may now seem.