JP Morgan Asset Management is overweighting Chinese equities on the understanding that the nation’s core inflation is contained and its policymakers are poised to end their tightening cycle.

Geoff Lewis, the firm’s head of investment services, says financials, commodities, infrastructure and consumers are the asset manager’s favoured sectors. The company has been buying into consumer stocks and is looking at commodity names in the copper and aluminium segments.

“We were tactically less overweighted [Chinese stocks] at the start of the year and are now back to strategic overweight,” Lewis told a media briefing in Hong Kong this week.

He thinks core inflation in China is “pretty well contained”, given that it excludes elements subject to volatile price movements including food, commodities, housing and transportation, which account for 90% of the increase in CPI.

Based upon JP Morgan’s forecast that China inflation will peak in the middle of this year at 6-7%, Lewis believes China is approaching the end of its tightening cycle.

Due to the lag effect of monetary policy, “if you carry on tightening until inflation starts to come down, you are likely to have a recession so you have to stop ahead of the peak of the inflation”, he adds, pointing to 2008 when China stopped tightening with inflation still on an upward trend.

That said, Lewis believes there is at least one more rate hike to come from the People’s Bank of China this year, and Chinese banking stocks will be beneficiaries of higher interest rates.

As a house, JP Morgan AM sees infrastructure as a strong investment theme in China’s equity universe. Lewis is expecting infrastructure investment in emerging economies to attract additional private sector investment with its strong impact on underlying growth, as China aims to transition its economic model to become more reliant on domestic consumption.

“We are glad that investment [in China] hasn’t slowed dramatically,” he says, noting its fixed-asset investment remains steady with year-on-year growth of 25% in the first quarter. This, he says, offers comfort of a soft landing for the economy, which he expects to grow at about 9% this year.

In a note of caution to investors, Lewis says risk assets generally remain vulnerable to a slowdown with developed market policy support likely to wane, and he points to the fact that the best-performing assets this year have been high-yield corporate bonds.

On a global outlook, he notes that QE2 has succeeded in pushing investors further along the risk curve, and anticipates that central banks will roll out policy normalisation at varied pace to prevent future overheating problems.

Given that developed world growth has been supported by aggressive monetary easing, “we expect 2011 to be the peak of the business cycle”, he says, but says this does not mean the world is heading for a downturn in 2012, nor that expansion will end.

In asset-class terms, Lewis sees equity valuations as reasonable with regard to earnings and attractive compared with bonds and credit. “In the short term we expect equities to be range bound,” he says. “Further out we expect more pedestrian, though still positive, returns.”

But he believes it is premature to argue emerging market equities are entering overheating territory. “US retail investors are beginning to rediscover the value of equities,” he says. “I don’t think it means the time is up for emerging markets because a good US stock market and good US economy is good for Asia.”

While he acknowledges that developing world inflation is an issue, he says it is still containable and not systematic.

He also notes that fund flows have been moving to emerging-market debt, which “obviously is going to be a growing asset class” – admittedly from a low base as it represents well below 1% of major US institution portfolios.

China and India are both intent on developing and deepening their corporate and sovereign bond markets, with emerging markets certain to witness a rise in local-currency bond issuance given appreciation expectations.