Strategy weekly

On the policy front, there are signs of policy relaxation in senior officials’ speeches. We expect the regulators to continue the tight monetary policy and proactive fiscal policy but make adjustment within the policy mix. Monetary policy enjoys quite a deal of flexibility in open market operation, loan quota control and window guidance and fiscal policy will play positive role in post-quake reconstruction, export tax rebate, energy saving, subsidy to farmers, employment and training.
 The strength of the market in the past week is attributed to (1) the previous plunge of large caps, which released the risks and rendered the market oversold, (2) expectation of policy relaxation, crude oil price retreat and expected retreat of CPI in June. The focus last week was oversold and low-PE heavyweight stocks, banking and real estate which are sensitive to policy relaxation.
 Last week’s focus is expected to continue if the expectation of policy relaxation is materialized this week. Low-PE heavyweight stocks and banks, real estate will continue the strength and the index is expected to rebound, in our view. On the contrary, if the expectation falls through, fluctuation is inevitable. Besides, whether the oil price will hit new highs will be a key risk factor.
 Recommendations: Investors are advised to focus on the strong run from 1H08 earnings report. Most of the preliminary reports up till now are better than expected, esp. the heavyweight sectors. Up till July 11, 2008, a total of 649 companies announced their 1H08 reports, most of which have maintained relatively fast growth. Sectors with outstanding earnings reports and big previous plunge such as banking, machinery are recommended. Weekly Catchwords: Policy expectation, 1H08 earnings reports