China - Market Strategy 04 (Aug 18 - Jan 23)

[winston]

China Strategy – the CEWC placed stability being the top policy priority

The Central Economic Work Conference (CEWC) sent a clear message that economic stability being the top policy priority.

In light of economic slowdown & the Party’s 20th Congress in 2022, the CEWC mentioned local authorities & ministries to be responsible for macro-economic stability.

It highlighted policy stance with concrete measures in fiscal, monetary and property areas –
i) accelerating fiscal spending & infrastructure construction,
ii) a more flexible monetary policy, and
iii) a marginal easing in real estate sector.

The CEWC highlighted detailed explanation & clarifications on long-term policy focus, i.e., common prosperity, carbon neutrality, & control of disorderly expansion of capital.

We believe it will lead to adjustments in the pace & intensity of policy implementation, as the policymakers aim to lower extreme actions & encourage cautiousness in implementing measures.

The CEWC statement also kept a number of hawkish wordings on anti-monopoly & fiscal policy, reiterating that counter-cyclical easing is likely to be intensified but unlikely to be aggressive.

We are getting more constructive on Chinese equities in light of the counter-cyclical easing policy tone being confirmed at the CEWC.

Within Chinese equities, we reiterate our relative preference to the onshore A-share market.

For the offshore MSCI China index, we would be mindful of three key challenges:-
i) more sensitive to faster-than-expected US tapering and interest rate lift-off
ii) potential pressure on liquidity from Chinese ADRs fund raising, &
iii) multiple offshore Chinese developer bond maturities in 1Q22 may result in more volatility if there would be more defaults.

We have been advocating a barbell strategy & prefer:-
i) companies and sectors with policy support to drive growth &
ii) those with strong cash flow and dividend support.

Near-term trading opportunities in real estate, internet/platform companies & materials on relief rebound.

Chinese banks are approaching towards 4Q21 results announcement, & the sector offers a relatively high estimated dividend yield of 7%+.

For investors focusing on long-term structural growth, the CEWC reconfirms our preference to renewables & new energy vehicles sectors.

We also prefer domestic consumption, but it will take time to unfold.

Source: OCBC

[winston]

Market Strategy
2022 – A Slow Climb Up

While still facing a wall of worries, Chinese equities are expected to recover in 2022
on easing COVID-19 fears, peaking of regulatory risks and supportive macro
policies.

We see a potential upside of 17.9% for the MSCI China index by 2Q22 and
expect EV, IT hardware, renewable energy and consumption-related names to
outperform.

Potential thawing of Sino-US relationship would also be positive for exporters, apparel, auto parts, electronics and appliances.

Within the Chinese equity universe, we see electric vehicles, IT hardware, renewable energy and consumption-related sectors outpacing the broader market on the back of structural growth and supportive policies.

We recommend staying OVERWEIGHT on these themes and the beneficiaries of the potential thawing of Sino-US relations.

Our key picks are:
Alibaba, BYD, CATL, China Education Group, China Longyuan, CR Beer, Estun
Automation, Haitian, HKex, Ganfeng Lithium, Li Ning, Netease, Sunny Optical, Ever
Sunshine, Trip.com, Wuliangye, Wuxi Bio, Yili, and Zijin.

Source: UOBKH

https://research.uobkayhian.com/content ... fa3ca2716a

[winston]

HSBC: Funds May Turn from UW to Neutral on CN Mkt Allocation in 2-3 Mths

A majority of equity funds will turn from Underweight to Neutral when in comes to allocation to the China market, opined Herald van der Linde, Chief Asia Equity Strategist at HSBC.

He believed the trend will continue in the coming two to three months and was thus upbeat on China, the emphasis of which is now on high and new technology as well as renewable energy.

Equally, Beijing is putting the brakes on regulation, likely bringing investment opportunities.

HSBC was bullish on the China market thanks to policy support, while staying positive on the Hong Kong bourse.

Source: AAStocks Financial News

[winston]

China Strategy - Common prosperity lends support to domestic consumption

The policymakers place “Common Prosperity” as a key policy motivation for the shifts in regulation and governance framework, which we believe would guide economic growth and investment themes.

In this note, we will address domestic consumption which would be a key beneficiary in light of the government’s policy priority to raise the income of low-income group and to groom a sizeable middle-income class.

This would provide support for both consumer staples, such as household durables, food products, and apparel, and overall consumption demand over the medium term in light of a more efficient wealth and income distribution, especially in autos, consumer durables, and services.

It should be structurally positive for sustainable consumption upgrade, especially making the premiumization of fast-moving consumer goods categories accessible to massive consumers at low-tier cities.

We have identified four key trends will drive Chinese consumption this year and they are:-
i) regulatory headwinds and tailwinds,
ii) cost inflation and pricing power,
iii) adjusting to Covid-zero policy, and
iv) demand recovery towards 2H22.

We believe the consumer sector will be in a tug of war between the current soft fundamentals and the expectation of recovery towards 2H this year.

We expect softness in fundamentals will persist in the near-term and the upcoming announcement results season is likely to see further consensus earnings downgrade.

Despite that fundamentals are in or below the mid-cycle for many consumer stocks currently, most leading consumer companies are trading around or above the mid-cycle level.

We will focus on companies that are relatively better in managing cost and margin.

Towards 2H22, we expect demand recovery to pan out, thanks to potential policy easing impact to filter through and a more favourable base effect.

We prefer companies that:-
i) can deliver earnings growth despite softness in macro environment, and
ii) would be core holdings with long-term structural outlook.

We like dairy, home appliance, sportswear and selected auto and food players.

Our preferred picks are Geely, Great Wall Motor, Haier Smart, Li Ning, Mengniu, Midea, Minth & Tingyi.

We have a cautious stance on education and Macau gaming given ongoing sector uncertainties and advise clients to switch out in view of a prolonged period of overhang expected.

Source: OCBC

[winston]

State-run Securities Daily: Institutional Investors Expected to Become Backbone of A-shr Mkt

A Chinese state-owned media, Securities Daily, published an article on the current condition of the A-share market, remarking that the recent weakness of the A-share market was primarily a result of overreaction towards certain negative factors and that such overreaction was generally initiated by institutional investors.

The article further called for institutional investors, such as securities companies, fund companies, pension funds and insurance companies, to take up the responsibility to lead and promote the practice of value investing, while safeguarding the stable and sustainable development of the capital market by becoming the backbone of the A-share market.

Source: AAStocks Financial News

[winston]

China’s $1.2 Trillion Stock Selloff Triggers Media, Fund Support

At least 15 mutual funds have committed to buying their own equity-focused products in the past couple days, a move that may have been coordinated.

A series of recent articles in state media have touted the attractiveness of Chinese stocks on valuation and policy support, with the Securities Times calling the act of the funds “setting a good example.”

A growing number of strategists have turned overweight on the nation’s equities this year, citing monetary easing and fewer regulatory concerns.

Still, worries over China’s growth and the property market distress are casting doubts over a swift turnaround.

72% of companies traded on the CSI 300 are now below the 200-day moving average, the most since April 2020.

China’s authorities have taken steps to calm markets in previous routs, using a range of avenues from state-media articles, regulators’ speeches, enlisting help from mutual funds, and in some cases, direct buying through state funds.

Source: Bloomberg

https://finance.yahoo.com/news/china-1- ... 01909.html

[winston]

Why Chinese stocks may have hit the bottom

With US Fed tightening and PBOC loosening, Chinese shares could be a good place to ‘hide out’ from rising market turbulence

By WILLIAM PESEK

The hope is that during the February 4-20 Beijing Olympics, Team Xi will showcase a nimbler and more pragmatic policy to tame the virus.

Source: Asia Times

https://asiatimes.com/2022/01/why-chine ... 340db87eb1

[behappyalways]

China's "National Team" Rushes To Save Stocks After Bear Market Signaled
https://www.zerohedge.com/markets/china ... t-signaled

[winston]

China strategy: Clear policy easing signals

In light of a diverging policy trend, we look at HK and Chinese equities markets performance in previous cycles to gauge any guidance from historical performance.

Chinese onshore equities market has been more responsive to Chinese easing cycles since 2015 and the onshore A-shares mid-caps (i.e., CSI500) delivered the strongest outperformance three-months after the rate cuts announcement.

During the previous US rate hike cycle in 2015-18, HK and Chinese equities markets delivered negative returns one-month prior to and one-month after the hike in end-2015 with Hang Seng Index performed the best among the three indexes.

Heading into the rate hike cycle, HK and Chinese equities posted double-digit positive returns 3-month post the last rate hike in Dec-18 on improving growth outlook.

We maintain our preference to the onshore A-share market and we also prefer Hang Seng Index (HK equities) owing to its relatively high exposure to the financials sector which would benefit from the US Fed rate hike cycle.

Our pecking order at the index level is CSI300 (the onshore A-share market) > Hang Seng Index (HK equities) > MSCI China (the offshore Chinese equities market).

Despite that there are several challenges and overhangs in place in the near-term for the offshore MSCI China index, valuation has become more attractive with forward P/E multiple has retrenched to below historical average level and is trading at a discount to MSCI Emerging Market.

In the near-term, MSCI China could stay range-bound in light of Chinese New Year holiday and the market would wait for more pro-growth supportive policies in the upcoming NPC.

In the medium-term, we are getting more constructive on MSCI China after the upcoming results season in March as the pressure of earnings downward adjustment moderates and further supportive policies and measures to support growth.

We prefer HK financials and key investment themes that could benefit from policy tailwinds:
i) de-carbonization,
ii) onshore sourcing and import substitution,
iii) new infrastructure, and iv) domestic consumption.

In the near-term, there would be trading opportunities for Chinese banks (for its relatively high dividend yield in the coming results announcement in March), a relief rebound in Chinese properties (to rotate out from low quality developers), and selected infrastructure and building materials.

Source: OCBC

[winston]

China’s Stocks Unlikely to Roar Back From Their Bear-Market Lows

by Abhishek Vishnoi

Easing concerns about regulatory headwinds for the nation’s battered tech sector.

The CSI 300 had fallen into a bear market amid a $1.2 trillion rout just before the holidays, as worries about a weak economy and the property sector’s debt woes outweighed Beijing’s monetary easing.

To take more steps to restore investor confidence, including stronger fiscal spending and further credit loosening?

Weak local manufacturing and housing data and an expanding camp of hawkish foreign central banks.

“Economic activity appears to have been hurt by ongoing and potentially more aggressive restraints given the omicron outbreak and the need to control pollution around the Winter Olympics.”

The yuan hit a record against a basket of peers last month.

How much additional liquidity the People’s Bank of China withdraws from the financial system now that the seasonal surge in cash demand is over?

Source: Bloomberg

https://finance.yahoo.com/news/china-st ... 58826.html