China - Market Strategy 06 (Jul 24 - Dec 26)

[winston]

<News Alert> China/HK equity strategy: Harsher-than-expected US reciprocal tariff

On April 3, US president Donald Trump said he will apply a minimum 10% tariff on all countries and slap additional duties on around 60 counties with the largest trade imbalances with the US

China specifically, a 34% tariff will be imposed on top of the existing 20%, according to Treasury Secretary Scott Bessent

We believe the reciprocal tariffs announced today are higher and broader than both market expectations and our own

China and HK markets will demonstrate relative resilience after digesting the initial sentiment impact today due to smaller revenue exposure to US and lower mkt correlation; consumption and property stocks may benefit on rising policy hopes

Source: DBS

https://www.dbs.com/insightsdirect/coun ... ecid=24654

[winston]

<Research>Citi Bullish on CN Domestic/ Services/ Growth Stocks Under US Tariff Measures; Top Pick TENCENT

According to Citi's report, the tariff hike by the US on Chinese goods was beyond the broker's previous estimate as the total tariff rate could reach about 65%.

US Treasury Secretary Scott Bessent confirmed a 54% tariff rate on China (including 34% reciprocal tariffs and 20% fentanyl tariffs), and the earlier Section 301 tariffs could still be applicable with an effective rate of about 11% as of the end of 2024.

In Citi's prediction, the most vulnerable Chinese sectors may include communication infrastructure, machinery, solar, hardware, apparel and footwear.

The broker preferred Chinese domestic, services, and growth stocks.

It recommended overweighting the internet as well as technology and transportation sectors, together with selective consumer stocks.

China's technology stocks were inexpensive compared to the Magnificent 7 in the US. Citi's top picks included TENCENT (00700.HK) , ASMPT (00522.HK) , BYD COMPANY (01211.HK), AIA (01299.HK), HAIER SMARTHOME (06690.HK) and ANTA SPORTS (02020.HK).

Source: AAStocks Financial News

http://www.aastocks.com/en/stocks/news/ ... -news/AAFN

[winston]

<Research>UBS Expects Net Inflows from CN Insurers/ Mutual Funds/ Social Security Funds into CN Stock Mkt This Yr to Be RMB1T/ RMB590B/ RMB120B

After the US government announced a 34% “reciprocal” tariff hike on China last Wednesday (2nd), the A-share market fell sharply, UBS released a report saying.

UBS estimated that the US' weighted ad valorem tariff rate on imports from China could reach about 63% on average after the tariff hike.

On 7 April, the A-share market fell sharply, while the high-beta TMT sector and the manufacturing sector, which account for a relatively high proportion of exports, were among the biggest losers.

UBS expected that, over the course of 2025, besides the “national team”, other long-term investors may enter the A-share market in a sustainable and stable manner under the guidance of Chinese regulators.

The broker forecasted that net inflows into the China stock market from Chinese insurers/ mutual funds/ social security funds could reach RMB1 trillion/ RMB590 billion/ RMB120 billion respectively.

UBS believed that long-term funds are regarded as the “ballast” of the market due to their solid management style and long-term investment vision.

Source: AAStocks Financial News

http://www.aastocks.com/en/stocks/news/ ... -news/AAFN

[winston]

Chinese exchanges restrict daily stock sales as trade war with US escalates, sources say

Two investor sources said a soft limit on daily net sales by individual hedge funds and big retail investors - implemented through verbal warnings from brokerages - had been set at 50 million yuan (HK$53 million).

Source: Reuters

https://www.thestandard.com.hk/breaking ... ources-say

[winston]

China Strategy - Higher volatility warrants a defensive bias

While value could have started emerging, we believe it warrants a more defensive stance as the US-China negotiation path remains highly uncertain and dependant on further actions by both countries.

We expect HK and China equity markets are likely to be clouded by external risks associated with the escalation of tariff disputes in 2Q25 and is likely to extend to 3Q25.

This is likely to cap further valuation re-rating in the near term despite early signs of earnings improvements in the latest results announcement season.

In the near term, we prefer the onshore A-share market during periods of tariff disputes as it has proven to be more resilient during the Trump 1.0 tariff disputes in 2018-2020 along with the support from the “national team”.

At the sector and industry level, we prefer domestic-focused ones and avoid export-focused industries and those with higher US revenue exposure.

We reiterate a barbell strategy focusing on quality yield stocks especially during the periods of tariff disputes and rotate to growth and high beta stocks during periods of trade truce and when negotiation and deals settled.

We maintain our preference for the three investment themes.

First, we prefer quality yield stocks to cushion market volatility while waiting for more clarity on tariff negotiations and supportive policy rollout. Aside from telcos which have stable and highly visible cash flow to support dividend, we also like selected China state-owned (SOE) banks with strong capital position which would have relatively lower dilution from recapitalisation, and selected utilities.

While China’s three major oil companies offer more than 8% forward dividend yield, if global demand slow further, oil price will be subjected to further downward pressure. Hence, we maintain our preference on China Mobile (941 HK), China Telecom (728 HK), CCB (939 HK), ICBC (1398 HK) and China Resources Power (836 HK), but remove PetroChina (857 HK).

Second, we prefer HK-listed internet and platform plays, which are mainly domestically focused and are key proxies to the acceleration and broadening of China’s artificial intelligence (AI) adoption, which is a structural trend.

We prefer Alibaba (9988 HK) and Tencent (700 HK) as core holdings. Trading at 9.5x forward P/E, share price of Alibaba is pricing in zero value to its cloud business, its investment in associated companies and its net cash position. Given the company has low single-digit US revenue exposure, we believe value has emerged on the back of a high single-digit eCommerce and teens level Cloud revenue growth.

Tencent is trading at 14x forward P/E with low single-digit US revenue exposure (via international game revenue). Its sizeable games business makes it relatively more defensive among its peers.

Third, we prefer policy beneficiaries, such as those could benefit from stronger emphasis on domestic consumption and technology innovation. We expect policymakers will step up support on domestic consumption. Some of the consumer names also offer decent dividend yield, such as Kweichow Moutai (600519 CH) at 3.6% 2025 dividend yield.

For dual-listed stocks (i.e. China ADR and HK-listed), we prefer HK-listed ones owing to rising US-China geopolitical tensions. Also, for the HK-listed stocks that are eligible for trading under Stock Connect program, they could potentially benefit from the Southbound inflow.

The ADR de-listing back in 2021-22 triggered an average drawdown of about 21-22% for China ADR.

Given many of the large-cap China ADR have dual-listing and the HK-listed ones now account for about 60% of combined market cap, the impact of a potential de-listing should be more manageable than previous round.

As such, China ADR which do not have a dual-listing in HK are likely to have larger impact if the de-listing is announced and implemented.

Source: OCBC

[winston]

Multi-billion US dollar exodus hits China ETFs

Outflows from US-listed emerging market ETFs that invest across developing nations, as well as those that target specific countries, totalled US$5.57bil in the week ended April 11, the most in a year.

Of that total, US$3.69bil came from China.

Meanwhile, Chinese ETFs listed on the mainland saw nearly US$24bil in net inflows last week, eclipsing a prior record of around US$23bil set in October, as state-backed funds purchased the products to support the stock market. —

Source: Bloomberg

https://www.thestar.com.my/business/bus ... china-etfs

[behappyalways]

Which is why we weren't at all surprise to read that Chinese bourses have set daily restrictions on net share sales by hedge funds and large retail investors, Reuters reported noting that Beijing has stepped up support for its stock markets in an intensifying trade war with the United States.

Two investor sources said a soft limit on daily net sales by individual hedge funds and big retail investors - implemented through verbal warnings from brokerages - had been set at 50 million yuan ($6.83 million).

Failure to comply risked a suspension of trading accounts by the stock exchanges, which have issued the directive, the Reuters sources added.


China Limits Stock Sales To Maintain Impression Of Stability, As Bessent Hints At Boosting Treasury Buybacks If Fed Does Nothing

https://www.zerohedge.com/markets/china ... g-treasury

[winston]

<Research>JPM: Worst Phase of US-CN Trade Tension Escalation May End; CN Dotcoms Still Top Picks for 'Buying Bounce'

According to a report from JPMorgan on the Chinese market strategy, the MSCI China Index/ CSI 300 Index saw a moderate rebound of 1.6%/ 0.6% last week, thanks to continuous "national team" buying and market expectations for new easing policies.

The rebound has spanned multiple sectors, with the exception of information technology.

Two defensive sectors (communications/ energy) and the policy optionality (real estate) delivered a mild outperformance.

Related News - CLSA: ADR Delisting Risks Aggravate; PDD & Vipshop, w/o HK Listings, Face Greatest Risk

In its strategy outlook for China’s stock market in 2Q25, JPMorgan expected the market to "step back" in early April due to US policy actions.

As mentioned last week, the worst phase of re-escalated trade tensions may have passed. The market’s focus will shift to US-China negotiations and China’s own policies.

The internet sector remained JPMorgan's top pick for "buying the bounce", though US financial restrictions may limit related valuation re-rating.

The broker was still upbeat about stocks with high dividend yield and sectors with policy flexibility, namely state-owned banks, Chinese real estate, energy, and utilities.

Source: AAStocks Financial News

http://www.aastocks.com/en/stocks/news/ ... -news/AAFN

[winston]

China Strategy: Faster-than-expected trade de-escalation

Key highlights:

Effective tariff rate on China will be lowered to around 40%, which comprises of
i) the inherited effective tariff rate of about 11% since Trump 1.0 that continued through Biden’s administration;
ii) the 20% fentanyl tariff; and
iii) the 10% reciprocal tariff, which is similar to those being imposed on other countries

China will lower its recent tariffs on US imports to 10% from 125%, making the overall new effective tariff rate on the US at around 28%

Establishing a mechanism to continue discussions about economic and trade relations” which will be led by China Vice Premier He Lifeng, US Treasury Secretary Scott Bessent and US Trade Representative Jamieson Greer

The joint statements did not mention several issues, such as the fentanyl tariffs, export controls, purchase agreement and the TikTok deal, which we believe these would be key issues to monitor for future discussions.

The latest development should be viewed as trade truce and the path to reach a deal would remain bumpy and lengthy, akin to Trump 1.0 trade negotiations.

US Treasury Bessent also mentioned that it could take "two to three years" to reach a full agreement.

In addition, the trade de-escalation and the larger-than-expected rollback in tariffs is likely to lower the urgency of rolling out stimulus measures and would allow China policymakers to take time in assessing the economic situation before rollout additional stimulus. Markets have previously anticipated an additional CNY1-1.5t fiscal support in 2H25.

Hang Seng Index (HSI), MSCI China Index and CSI 300 Index rose 3.0%, 3.4% and 1.2% respectively yesterday. We remain constructive on Chinese equities on the back of trade de-escalation with attractive valuations and low positioning among institutional investors.

The MSCI China Index and CSI 300 Index are trading at 10.2x and 11.9x forward price-to-earnings (P/E), implying -0.6s.d. and -0.2s.d. to historical average, whereas HSI is trading at historical average of 9.8x forward P/E. Also, the MSCI China Index is trading at 10% valuation discount to MSCI Emerging Market (MSCI EM) Index.

Positioning among institutional investors is still relatively light with global emerging market funds underweighting China by about 2.5%, representing the largest underweight among countries.

Our HSI index target under a base / bull / bear case is at 24,800 / 26,400 / 19,800 respectively.

We prefer offshore Chinese equities in the near-term on the back of trade de-escalation. We reiterate a barbell strategy given trade negotiations remain bumpy and lengthy; we expect a near term rotation to growth and high beta stocks during periods of trade truce and de-escalations of trade tensions.

We maintain our preference on quality yield stocks despite the pullback potential but we believe it offers opportunities to accumulate especially for income-oriented investors.

We maintain our preference for the three investment themes.

First, internet and platform companies, which are the proxies of China market given their large index weight, accounting for close to one-third of the market index weight.

Large-cap internet and platform companies will start reporting quarterly results this week and the key focus would be the pace of artificial intelligence (AI) adoption and commercialisation.

We prefer Alibaba (9988 HK) and Tencent (700 HK) as core holdings. JD.com (9618 HK) has the most attractive valuation among its peers as it also has the highest uncertainty in terms of earnings outlook owing to its higher-than-expected investment in food delivery. The stock is trading close to trough valuations of 7.2x forward P/E and is likely to have a rebound, but we will look for more clarity at its 1Q25 results announcement today (13 May) on potential earnings drag to gauge the extent of re-rating potential.

Second, policy beneficiaries focusing on domestic consumption and technology innovation. For details on consumption, please refer to the report “China Consumption: Better-than-expected Labour Day holiday data”.

Third, we remain our preference for quality yield stocks to cushion market volatility during tariff negotiations and can benefit from the potential incremental fund inflow by state-owned insurers and mutual funds. Despite recent yield compression, the yield spread remains attractive with China Government bond yields hovering at around 1.6%. In addition, share prices of stocks and industries that have sizeable US exposure are likely to see a relief rebound given they have been under pressure when US-China trade tension was elevated.

Source: OCBC

[winston]

Chinese stocks need earnings kick to fuel more market upside, JPMorgan says

A re-rating requires an improvement in profitability, which is difficult to come by in the weak economy, money manager says

by Aileen Chuang

Chinese equities are not as cheap as they seem because the nation’s economic slowdown has weakened corporate earnings, making it imperative for investors to screen stocks and sectors carefully to pick winners, according to JPMorgan Asset Management.

While they traded at 14 times historic earnings in line with the average valuation over the past decade, investors were getting less oomph from the current scenario because the return on equity was faltering due to weaker profitability trend, said Mark Davids, co-head of Asia-Pacific equities.

“It’s very difficult to argue that Chinese equities are particularly cheap,” he said in an interview on Friday.

“You could argue that the average of the past 10 years should not be reflective of where the market should trade as fair value.

For there to be a re-rating, you need an improvement in the profitability of Chinese companies and that’s difficult to come by if the economy is very weak.”

Source: SCMP

https://www.scmp.com/business/banking-f ... pe=section