Abstract

Overseas Chinese stocks also fell significantly last week under multiple pressures at home and abroad. However, compared with the A-share major index fell back to the previous low, the Hong Kong stock Hang Seng index is still above the monthly support line.The absence of the LPR downgrade last week raised concerns that stable growth policies are not fast and strong enough to meet the growing growth challenges.Which in turn accelerates the obvious weakening of the RMB exchange rate against the US dollar. In view of the current policy and economic growth situation, we believe that the RMB will still face some pressure before the epidemic is effectively controlled, especially before more stable growth policies are introduced.

Overseas, Fed officials strengthened their hawkish stance in public speeches.For China, although the acceleration of external policy tightening is certainly not a "friendly" situationAnd may superimpose current domestic challenges to increase pressure, but in contrast to external factors such as Fed tightening and Sino-US interest rate spreadsInternal variables such as the pace and intensity of stable growth policies are the key to determine exchange rates and market trends.

Looking forward, we expect that the short-term market is still likely to maintain the consolidation situation and need to wait for the policy to be further clarified.. Some key variables affecting market trends in the future include: 1) the policy signal from the Politburo meeting of the CPC Central Committee in the first quarter and the measures to stabilize growth after the epidemic has been basically brought under control; 2) the subsequent development of the epidemic and its impact on supply chain and economic activities; 3) Federal Reserve policy tightening, as well as Sino-US regulatory cooperation. On the whole, considering that the valuation of the Hong Kong stock market is lower and the dividend yield is relatively high compared with A shares.We believe that the opportunities faced by the Hong Kong stock market as a whole still outweigh the risks in the medium term.。

Text

Review of the market trend

Overseas Chinese stocks were hit hard last week by uncertainties such as the outlook for domestic economic growth, policy signals and the Fed's monetary tightening process. The Hang Seng Technology Index led the decline of 7.4%. The MSCI China, Hang Seng Index and Hang Seng China Enterprises Index fell 6.5%, 5.6% and 4.1% respectively, in line with the decline in A shares. All sectors fell across the board, with the real estate sector leading the decline, down 9.9%, while the media entertainment, raw materials, optional consumer and health care sectors all fell by 9.3%, 8.7%, 7.5% and 6.8%. On the contrary, the sectors of communications services (- 0.1%), essential consumption (- 1.6%) and utilities (- 2.6%) showed smaller declines.

图Table 1:MSThe CI China Index fell 6.5% last week, with the media and real estate sectors leading the decline.

Market prospect

Similar to the weak performance of the A-share market, overseas Chinese stocks also fell significantly last week under multiple pressures at home and abroad. However, compared with the A-share major index fell back to the previous low, the Hong Kong stock Hang Seng index is still above the monthly support line.

Domestically, last weekLPRThe absence of the downgrade has raised concerns in the market that the speed and strength of growth stabilization policies are insufficient to meet the growing growth challenges.In turn, it accelerates the obvious weakening of the exchange rate of RMB against the US dollar. Although economic data released last week showed that China's economic growth accelerated in the first quarter compared with the fourth quarter (GDP in the fourth quarter was 4.8% year-on-year, up from 4.0% in the fourth quarter of last year), it is found that there are still some hidden worries and may face more pressure from April to May under the pressure of the current epidemic. For example, retail sales of consumer goods fell 3.5% in March from a year earlier, as the rebound in the epidemic affected optional consumption and offline service consumption.Admittedly, in a sense, the monetary authorities have reasonable reasons to maintain a relatively restrained and loose policy.(for example, the recent cut of 25 basis points is lower than expected), mainly considering that liquidity is already quite loose on the one hand, and on the other hand, the external environment, such as the upside-down interest rate spread between China and the United States, may indeed bring some constraints. However, the steady growth of fiscal and other industrial policies is still lagging behind so far, especially given the continuing challenges to supply chains and economic activities posed by epidemic control measures in many cities.Therefore, for the market, the relative weakening of policy expectations superimposed fears that the current account surplus might significantly narrow under the prevention and control of the epidemic, putting obvious pressure on the RMB exchange rate.Not to mention the further deepening of the interest rate gap between China and the United States. The offshore RMB exchange rate against the dollar broke through 6.5 in just one week from less than 6.4, the lowest level since April 2021.

Given the current policy and economic growth,We believe that before the epidemic is effectively controlled, especially before more stable growth policies are introduced, the RMB will still face some devaluation pressure.However, relative to external factors such as Fed tightening and interest rate spreads between China and the United StatesWe believe that internal variables, such as the pace and intensity of stable growth policies, are the key to determining exchange rates and market trends.. Therefore, it is expected that the meeting of the political Bureau of the CPC Central Committee in the first quarter around the end of April and the policy measures after the epidemic may be effectively controlled around the beginning of May are important observation windows worthy of attention.

At the policy level, the people's Bank of China said it would continue to implement a prudent monetary policy and increase support for the real economy. At the same time, the individual pension system is also worthy of attention. Taking into account the aging population, we believe that the individual pension system is expected to provide an important and necessary supplement to the existing pension system, which will bring long-term benefits to China's capital market. From a long-term perspective, the size of individual pension accounts is expected to be more than one trillion yuan, which is expected to bring long-term institutional funds to the capital market.

Overseas, Fed officials strengthened their hawkish stance in public speeches. Last week, Federal Reserve Chairman Powell said that the upcoming meeting in May may discuss raising interest rates by 50 basis points.[1]To further increase market expectations of the process of policy tightening and put some pressure on US debt interest rates, the US dollar index and US stocks.For China, although the acceleration of external policy tightening is certainly not a "friendly" situation and may add to the pressure of current domestic challenges, domestic factors are still more important.. In other words, strong economic growth is strong enough to withstand capital outflows and exchange rate depreciation under the Fed's tightening, but vice versa.

Looking forward, we expect that the short-term market is still likely to maintain the consolidation situation and need to wait for the policy to be further clarified.. Some key variables affecting market trends in the future include: 1) the policy signal from the Politburo meeting of the CPC Central Committee in the first quarter and the measures to stabilize growth after the epidemic has been basically brought under control; 2) the subsequent development of the epidemic and its impact on supply chain and economic activities; 3) Federal Reserve policy tightening, as well as Sino-US regulatory cooperation. On the whole, considering that the valuation of the Hong Kong stock market is lower and the dividend yield is relatively high compared with A shares.We believe that the opportunities faced by the Hong Kong stock market as a whole still outweigh the risks in the medium term.. In terms of plate allocation, we suggest that we should look for benefits from the deterministic thinking of "cash flow", that is,High dividend and quality growth stocks orIt will provide more protection for investors in the current market volatility.

图Table 2:1Q22 China GDP grew 4.8% in the first quarter compared with the same period last year.

Chart 3: the offshore RMB exchange rate against the US dollar broke through 6.5, the lowest level since March 2021

Figure 4：Recently, interest rates in China and the United States have been upside down for the first time since 2010.

Figure 5：The Historical performance of overseas Chinese Capital stocks during the devaluation of RMB

Specifically, the main logic that underpins our point of view and the factors we need to pay attention to last week include:

1) 宏View: China's GDP grew 4.8% in the first quarter of 2022 compared with the same period last year, but it does not rule out the pressure in the second quarter.Despite being disturbed by repeated COVID-19 epidemics and increased uncertainty in the global macro environment, China's GDP recorded strong year-on-year growth of 4.8 per cent in the first quarter of 2022 (4 per cent in the fourth quarter of 2021) supported by economic indicators in January-February (for example, fixed asset investment rose 12.2 per cent year-on-year). It is worth noting that the total social zero in March fell 3.5% from the same period last year, the first negative growth since July 2020. Looking forward, the CICC Macro Group expects the COVID-19 epidemic to have a greater impact on the national economy in the second quarter, and structured policies may play an important role. We suggest paying attention to the upcoming meeting of the Politburo this month.

Chart 6: retail sales of consumer goods fell 3.5% in March compared with the same period last year

图表7：The added value of industries above scale increased by 5.0% in real terms in March compared with the same period last year.

2) profit: the profit growth rate of overseas Chinese stocks slows down in the second half of 2021, and the challenge remains.For the whole year of 2021, the overall profit grew by 23% year-on-year, and the profit growth rate reached 45% in the first half of the year. However, due to the decline in profits in the non-financial sector, the overall profit growth rate of the market slowed sharply in the second half of the year. In terms of segment segmentation, rising costs have weakened the profitability of the lower reaches. Specifically, the retail (including e-commerce), real estate and information technology sectors posted earnings growth of-138%,-42% and-37% respectively in the second half of last year. By contrast, profits grew strongly under the upstream sector, with profits in the energy and raw materials sectors growing at 43 per cent and 21 per cent, respectively. The decline in non-financial sector profits in the overseas Chinese stock market in the second half of 2021 is mainly due to a marked deterioration in profitability, on the contrary, sales revenue remains strong and resilient. In terms of growth quality, ROE remained basically stable in 2021. Compared with the first half of the year, the overall leverage of overseas Chinese stocks in the non-financial sector declined. From a top-down strategic perspective, we expect the overall earnings of overseas Chinese stocks to grow by 7.2% in 2022, including 8.6% in the non-financial sector and 5.9% in the financial sector. We believe that follow-up policy support and regulatory changes are the main factors affecting future earnings prospects. For a detailed analysis, please refer to our report "CICC | performance Review of overseas Chinese stocks in 2021: growth slows and challenges remain" issued on April 19, 2022.

3) Policy: the latest personal pension reform is expected to relieve the pressure of an aging population and promote the development of the capital market.On April 21, 2022, the General Office of the State Council issued the opinions on promoting the Development of personal Pension, which stipulated the participation scope, contribution level, tax policy and investment products of individual pension. We believe that the establishment of the individual pension system is conducive to further supplement and improve China's old-age insurance system. According to the data of the Ministry of Human Resources and Social Affairs and the National Bureau of Statistics, by 2020, the number of urban workers participating in basic old-age insurance is 450 million, and the number of urban and rural residents participating in basic old-age insurance is 540 million, providing a huge insurable base for the establishment of individual pension system. From a long-term perspective, the size of individual pension accounts is expected to be more than one trillion yuan, which is expected to bring long-term institutional funds to the capital market.

4) currency: implement a prudent monetary policy to deal with external environmental shocks safely.Yi Gang, governor of the people's Bank of China, attended the 2022 annual meeting of the Boao Forum for Asia and delivered a keynote speech, saying that he would continue to implement a prudent monetary policy this year, and would comprehensively use a variety of policy tools to provide more support to small and medium-sized enterprises. increase support for the real economy. In addition, Vice Premier Han Zheng said that despite the current increasing downward pressure, China is fully confident and capable of achieving sustained and healthy economic development.

5) under the fluctuation of the Hong Kong stock market, southward capital inflows continued, and the pace of overseas capital inflows accelerated.With the geopolitical conflict swaying and the pressure on epidemic prevention and control, southward capital continued to flow into the Hong Kong stock market last week, with a daily net inflow of HK $600m, down from HK $1.4 billion the previous week. Meanwhile, as of last Wednesday, a total of $1.5 billion of overseas funds had flowed into the Hong Kong stock market. Among them, passive funds continued the inflow momentum of the previous week, with inflows of $1.4 billion; total inflows of active funds totaled $121.3 million last week.

图Table 8: southbound capital inflows remain unchanged; the pace of overseas capital inflows accelerates

图表9：The total inflows of active funds last week totaled $120 million.

Investment suggestion

Overall, we expect the market to continue to consolidate in the short term until more supportive actions and catalysts emerge. In the long run, we believe that the favorable policy environment and low valuation level in the mainland will still bring more opportunities to the Hong Kong stock market. In terms of the plate, we suggest that we pay attention to it in the short term.High dividend mark and undervalued markSuch as some financial, telecommunications and energy sectors.High-quality growth stocks with a large decline in the previous periodIt is also worthy of attention. In addition, with the easing of the epidemic in Hong Kong, the targets of local consumption and finance in Hong Kong are also worthy of attention.

Focus on events

1) China's economic growth and policy changes; 2) geopolitical tensions in Europe; 3) epidemic changes; 4) Sino-US relations.