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By Bloomberg

HSBC Global Asset Management is stepping up bets on the Chinese economy, buying shares of industrial and energy companies that are most reliant on the nation’s growth outlook.

China’s low inflation and high interest rates give the government firepower for easing as it transforms the economy, said Bill Maldonado, chief investment officer for equities at HSBC Global Asset, which oversees about $465 billion. Energy and industrial shares are most attractive because they’re undervalued despite prospects for economic growth, he said.

“That’s where we’re hunting -- the very cyclical parts of the market,” Maldonado said. “China is going through a big structural reform that’s very investor friendly. It’s going to take a while, but at the end it’s going to be very positive for markets and very positive for profitability.”

The CSI 300 Index of shares in Shanghai and Shenzhen surged 36 percent since the central bank unexpectedly cut interest rates in November through yesterday, and as manufacturing and inflation data fueled optimism for further stimulus. Economists predict 7 percent growth this year, China’s slowest expansion since 1990, as policymakers seek to shift from an export- oriented model by opening up to private investment and market- driven changes.

Chinese industrials companies on the CSI 300 climbed 35 percent since the rate cut through yesterday and traded at 16.6 times estimated earnings, while a gauge of energy shares was valued at 15.6 times and up 28 percent even amid a slump in oil prices. The MSCI China Industrials Index of mainland companies traded in Hong Kong is up 8.9 percent over that span and was valued at a multiple of 11.8, compared with 16.5 for the Standard & Poor’s 500 Index yesterday. Maldonado said he is buying Chinese shares listed on- and off-shore while taking profit in some sectors, declining to name companies.

Low Valuations

“We’re trying to sell some of the Chinese financials that have done well and recycle back into stocks that are very cheap,” Maldonado said. “If you look at Chinese energy, industrials and consumer durables, they’re very cheap.”

Data last week showed China’s consumer prices rose 1.5 percent in December from a year earlier, near the slowest pace since 2009, while producer prices slumped 3.3 percent in the sharpest drop in two years on slumping commodity prices. A gauge of last month’s manufacturing activity slipped to the lowest level since June 2013.

Economists surveyed by Bloomberg Dec. 18-23 anticipate the central bank will follow up on a November interest-rate cut with further reductions and lower reserve requirements for lenders. The nation’s benchmark lending rate is at 5.6 percent, compared with U.S. rates near zero.

Even with potential easing, some say the upside for mainland shares is limited after last year’s rally, with Credit Suisse Group AG seeing the shares ending the year lower. The Shanghai Composite Index fell 0.2 percent this year through yesterday after surging 53 percent in 2014.

PetroChina Prospects

Chinese stocks are still cheap because most companies were rallying from low valuations, according to Maldonado. The Shanghai equity gauge, which surged to a 5 1/2-year high on Jan. 7, still trades 22 percent below its 10-year average estimated earnings multiples. State-owned PetroChina Co., China’s most valuable company, gave the biggest boost to the gauge last quarter as the government cut taxes on oil producers and amid prospects for private investors to buy stakes.

China will announce this year’s growth target in March at the National People’s Congress, where officials will outline policy goals for this year including reforms for state enterprises. Last year’s official expansion goal was 7.5 percent.

“The Chinese economy is going through a period of adjustment -- it’s not something that happens overnight, but our view is that it’s going well,” said Maldonado. “Because inflation is low and interest rates are still relatively high, there is a lot of room to maneuver for authorities, and they’ve got plenty of room to continue with the reform agenda and balance that with stimulus as needed. That makes us very comfortable to invest in China today.”