China rally in early days-Atlantis's Liu

By Jeffrey Hodgson

HONG KONG (Reuters) - China's stock market rally, which has pushed indexes to record highs, may be only the start of a multi-year bull-run powered by profit growth and the rising yuan, Atlantis Investment Management's top China fund manager said on Wednesday.

Yang Liu, chairwoman of Atlantis's Hong Kong unit, said China's domestic stock market is likely to rise more than 10 percent by year-end with the Shanghai Composite Index .SSEC hitting 6,000.

In the longer term, investors will profit most by holding financial, property, health care and resource stocks, while textile firms and automakers should be approached with caution, she said at the Reuters China Century Summit.

"(Yuan appreciation) is the long-term catalyst for China, a similar situation to that of Japan 30 years ago. Non-China investment in these assets has gains from both currency and capital gains. This is something very substantial," she said at the summit, held at the Reuters office in Hong Kong.

"This bull market has only run for three years for China, but you look at the other markets, they've had at least a 10 or 20 year bull market."

For the nearer term, the Hong Kong-based manager said the China Enterprises index of H shares .HSCE, or Hong Kong-listed shares in mainland companies, was likely to challenge the 20,000 level next year.

The H-share index hit an intraday record of 14,606.21 on Wednesday and would need to rise another 37 percent to reach 20,000.

But at that level stocks would only be trading at about 15 or 16 times 2008 earnings, which "does not look demanding given the China fundamentals", she said.

Liu, who manages $4 billion in Chinese assets for Atlantis, including the $592.5 million Atlantis China Fund and the Atlantis China Fortune hedge fund, said many investors were still underestimating the potential for Chinese stocks.

The high valuations of many stocks are underpinned by healthy profit gains and a booming economy, she said. And perceived risks to the growth outlook, such as rising inflation, may not be as serious as investors fear.

The Hong Kong-based fund manager said Chinese markets would not escape the impact of a shock to global growth, such as a U.S. recession, but that even then it would be a worthwhile place to invest.

"Who would be the first one to recover? My answer is China," she said.

"China is in the leading position and will be the safe haven, believe me or not, if there is turmoil globally. You have to park your money somewhere."

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Liu, who joined Atlantis in 2002 from CMG First State Investments, is widely regarded as a skilled stock picker.  Continued...