Source: CICC strategy
Abstract
As a result of the overall narrow consolidation of the overseas Chinese stock market last week, although the fluctuations in the peripheral markets continued or even more intense last week, overseas Chinese stocks showed some resilience, at least relative to last week. It is too early to tell whether the Hong Kong stock market will be "immune" to external volatility, but the lower valuation level is expected to provide some support for the market.
In addition, the appreciation of the US dollar has led to a new round of rapid depreciation of the renminbi and the Hong Kong dollar, allowing the Hong Kong Monetary Authority to inject liquidity into the market to maintain exchange rate stability. Although it is entirely normal for the HKMA to intervene in the market under the linked exchange rate system, it still shows that the Fed's entry into an accelerated tightening phase will inevitably lead to a strain on global dollar liquidity.
But on the positive side, southbound capital inflows provide some support for the Hong Kong market. The pace of southward capital inflows accelerated significantly last week, in line with our previous expectations.Taking into account the overall loose domestic liquidity and the comparative advantage of Hong Kong stock market valuations, we believe that the southbound capital inflow trend will remain unchanged since December last year.
Looking forward, we believe that the market may still need some time to digest external uncertainty, not to mention that the impact of the epidemic on the real economy will continue in the short term. However, we believe that lower valuations and policy support will provide downside protection, as exemplified by the recent acceleration of southward capital inflows.
Variables worthy of close attention in the future include: 1) epidemic turmoil and its impact on the supply chain; 2) follow-up policy landing; 3) fluctuations in the US stock market, US rate of return and US dollar exchange rate; 4) Sino-US relations.
In terms of plate configuration, we thinkHigh dividend yield target and high quality growth stocksIt will provide more protection for investors in the current market volatility. If more policies are introduced in the future, the benefits of stable growth are also worthy of attention.
Review of the market trend
The recipient country's overall narrow consolidation of the overseas Chinese stock market last week continued to absorb many internal and external uncertainties, such as further panic selling of US stocks and the continuing challenges to China's economic growth posed by the epidemic. At the index level, the Hang Seng Technology Index was basically flat (0.07%), while the Hang Seng Index, MSCI China Index and Hang Seng China Enterprises Index fell 0.52%, 0.17% and 0.04%, respectively. In the sector, health care, utilities and capital goods led the gains, up 2.7 per cent, 2.6 per cent and 2.3 per cent, respectively, while insurance, optional consumer and real estate sectors fell 2.2 per cent, 2.1 per cent and 2.0 per cent.
Chart 1:MSCI China Index fell 0.2% last week, with insurance and optional consumer sectors performing poorly
Source: FactSet, China International Capital Corporation Research Department
Market prospect
Although the volatility in the peripheral markets continued or even intensified last week, overseas Chinese stocks have shown some resilience, at least relative to last week. To be sure, it is too early to tell whether the Hong Kong stock market will be "immune" to external volatility, but lower valuations are expected to provide some support, which could explain why southward capital inflows rose significantly in the second half of last week.
In terms of the external environment, the better-than-expected US CPI data in April failed to allay market concerns about inflationary pressures and even led investors to worry that a forced acceleration of monetary tightening before inflation was brought under control could trigger a premature recession. Affected by this, US stocks continued to fluctuate last week, especially the growth sector came under pressure again, Hong Kong stocks were naturally affected to a certain extent.
In addition, the appreciation of the US dollar has led to a new round of rapid depreciation of the renminbi and the Hong Kong dollar. The offshore renminbi broke through the 6.8 barrier against the US dollar, while the Hong Kong dollar hit a weak convertibility undertaking of 7.85 against the US dollar, allowing the HKMA to inject liquidity into the market to maintain exchange rate stability. Although it is entirely normal for the HKMA to intervene in the market under the linked exchange rate system, it still shows that the Fed's entry into an accelerated tightening phase will inevitably lead to a strain on global dollar liquidity.
But on the positive side, southbound capital inflows provide some support for the Hong Kong market. The pace of southward capital inflows accelerated significantly last week, with inflows six times larger than the previous week, in line with our previous expectations. Looking ahead, given the overall loose liquidity in China and the comparative advantage in the valuation of the Hong Kong stock market, we believe that the southbound capital inflow trend since December last year may remain unchanged.
Domestically, the challenge of economic growth has intensified, and more stable growth policies are needed. The recent disclosure of major data highlights the impact of the escalation of the epidemic:
1) China's official CPI rose 2.1% in April from a year earlier, mainly due to logistics disruptions and increased demand for hoarding caused by the epidemic. The impact of rising commodity prices against the backdrop of the conflict between Russia and Ukraine, PPI rose 8.0 per cent in April from a year earlier, but slowed from 8.3 per cent in March. So far, inflation in China has remained moderate, but given the global supply shocks and the uncertainty of the epidemic, future inflation changes deserve continued attention.
2) Export growth slowed to a single-digit 3.9% in April from a year earlier, the lowest level since July 2020; imports were flat, mainly due to repeated outbreaks across the country that led to factory shutdowns and sluggish domestic demand.
3) what is more noteworthy is that 910.2 billion yuan of social finance was added in April, which was significantly lower than the market expectation of 2.6 trillion yuan, and the growth rate of social finance stock dropped to 10.2% from 10.6% in March. Weak loans are the biggest drag. New loans totaled 645.4 billion yuan in April, significantly lower than the 3.13 trillion yuan in March, highlighting the low demand for credit against a backdrop of repeated epidemics. The above data clearly show that the epidemic poses a great challenge to short-term growth and therefore requires more support for stable growth policies, including, but not limited to, further monetary easing.
Shanghai hopes to achieve zero social outbreaks by mid-May, when orderly liberalization, limited mobility, effective control and classified management will be implemented, Shanghai officials said on Friday. In this context, the future epidemic changes and policy trends deserve close attention.
Looking forward, we believe that the market may still need some time to digest external uncertainty, not to mention that the impact of the epidemic on the real economy will continue in the short term. However, we believe that lower valuations and policy support will provide downside protection, as exemplified by the recent acceleration of southward capital inflows.
Variables worthy of close attention in the future include:
1) epidemic turbulence and its impact on the supply chain
2) the landing of follow-up policies
3) volatility of US stock market, US yield and US dollar exchange rate
4) Sino-US relations.
Specific to the plate allocation, we believe that the target of high dividend yield and high-quality growth stocks will provide more protection for investors in the current market fluctuations. If more policies are introduced in the future, the benefits of stable growth are also worthy of attention.
Chart 2: weak-side convertibility undertaking at 7.85 against the US dollar
Source: Wande Information, China International Capital Corporation Research Department
Specifically, the main logic that underpins our point of view and the factors we need to pay attention to last week include:
1) Macro: repeated outbreaks and geopolitical conflicts continue to push up China's inflation rate.Affected by the prevention and control of the epidemic, logistics disruptions and hoarding pushed up domestic food prices, with official CPI rising 2.1 per cent year-on-year in April from 1.5 per cent in March. Among them, the prices of vegetables, fruits and eggs rose 24%, 14.1% and 12.1% respectively compared with the same period last year.
Meanwhile, as the conflict between Russia and Ukraine continued to push up international commodity prices, PPI rose 8.0 per cent in April from a year earlier, down from 8.3 per cent in March, but still higher than market expectations for three consecutive months. The CICC Macro Group expects the PPI hub to be around 6 per cent for the whole year of 2022, and the CPI hub may remain moderate throughout the year. It is expected that geo-conflicts will have a longer impact on supply, and recurrent outbreaks will have a longer impact on demand.
In the context of epidemic prevention and control, the performance of exports was weak in April.Affected by a high base and logistics disruptions and factory production constraints caused by the epidemic, China's export growth slowed sharply to 3.9% in April from 14.7% in March. The expansion of production in some Southeast Asian countries has also replaced China's exports to a certain extent. Meanwhile, imports were flat in April from a year earlier, after falling 0.1 per cent in March. In particular, it should be pointed out that imports and exports of high-tech products have declined significantly, while the growth rate of imports of raw materials has accelerated in the context of the policy of steady growth.
Chart 3: China's CPI and PPI rose 2.1% and 8.0% year-on-year in April
Source: Bloomberg, Wande Information, China International Capital Corporation Research Department
Chart 4: China's exports grew by 3.9% in April, a sharp slowdown from 14.7% in March.
Source: China International Capital Corporation Research Department, Bloomberg
2) Monetary policy: affected by the epidemic suppression of credit demand, the financial data in April was significantly lower than market expectations.On Friday, China released new social finance and credit data for April, which was significantly lower than market expectations. Specifically, the new social finance increased by 910.2 billion yuan in April, significantly lower than the 4.65 trillion yuan in March, a decrease of 946.8 billion yuan compared with the same period last year. The main drag on the sharp decline in new social finance is that new RMB loans were only 645.4 billion yuan in April, significantly lower than 3.13 trillion yuan in March, reflecting weak credit demand in the context of the epidemic. In April, housing loans for residents decreased by 60.5 billion yuan, an increase of 402.2 billion yuan over the same period last year.
In particular, driven by fiscal expansion, M2 money supply growth rose 0.8 percentage points month-on-month to 10.5% in April. In its report on the implementation of Monetary Policy in the first quarter of 2022 released last Monday, the people's Bank of China said it would increase its support to the real economy and maintain reasonable and abundant liquidity.
Chart 5: 910.2 billion yuan of new social finance was added in April, significantly lower than 4.65 trillion yuan in March.
Source: Factset, China International Capital Corporation Research Department
3) in the face of the devaluation of the Hong Kong dollar, the HKMA intervened in the market to stabilize the exchange rate of the Hong Kong dollar.The exchange rate of the Hong Kong dollar against the US dollar hit the weak convertibility undertaking of 7.75-7.85 for the first time since 2019. The recent weakness of the Hong Kong dollar is mainly due to rising interest rates in the United States, while continued liquidity in the interbank market in Hong Kong has increased capital outflow pressure against a backdrop of rapidly widening interest rate spreads between the US dollar and the Hong Kong dollar. Under Hong Kong's linked exchange rate mechanism, the HKMA bought HK $8.5 billion from the market on Thursday and Friday to stabilize the Hong Kong dollar, the first time the HKMA has intervened in the market since October 2020. Looking forward, given that the US interest rate rise carry trade is likely to continue, we believe that the HKMA will continue to take similar interventions in the coming months to maintain exchange rate stability.
4) MSCI published the results of its biannual index review of all its indices in May 2022.The MSCI China Index added 33 stocks and eliminated 45 stocks. We suggest that we pay attention to the potential positive impact of this adjustment on Orient Overseas, Xtep International, Yitai B, Pop Mart International and JD Health, as well as the potential negative impact on Bohai Bank, Huabao International, R & F Real Estate, Liwen Paper, The Wharf and Gao Xin retail. All the above adjustments will be implemented after the close on May 31 and will take effect on June 1.
5) liquidity: southward capital inflows continued last week, while overseas funds turned to net outflows.The average daily inflow of southbound funds last week was HK $5 billion, up from HK $1.7 billion the previous week. Mainland investors mainly buy Meituan and Tencent and sell Country Garden Holdings and China Shenhua Energy. At the same time, a total of $1.4 billion of overseas funds flowed out of the Hong Kong stock market (as of Wednesday), including both active and passive funds, with outflows of $680 million and $750 million, respectively.
Figure 6: southbound capital inflows continued last week, while overseas funds turned to net outflows
Source: EPFR, Wande Information, China International Capital Corporation Research Department
Investment suggestion
On the whole, we believe that the short-term market will continue to consolidate, investment sentiment still needs time to repair, and more positive policies are expected. We judge that opportunities outweigh risks in the medium term. On the sector side, we believe that high dividend targets and low valuation targets, such as some financial, telecommunications and energy sectors, will provide investors with more protection from the current market volatility. At the same time, we recommend that we focus on high-quality growth stocks with sufficient valuation correction, but less affected by the overall macro environment, which can still provide steady growth.
Focus on events
1) China's economic growth and policy changes; 2) geopolitical situation; 3) epidemic changes; 4) Sino-US relations.
Edit / lydia