Source: CICC strategy
Author: Wang Hanfeng, Liu Gang, etc.
CICC released a research report saying that at present, the Fed's monetary policy, China's growth repair, and the progress of China and the United States in the audit field are the three main catalysts for the turnaround of the Hong Kong stock market. the possible improvement of any of these factors will directly address one of the "triple pressures" currently suppressing the Hong Kong stock market, that is, the Fed tightening affects liquidity, weaker corporate earnings, and rising risk premiums. Domestically, manufacturing PMI fell to a contraction zone in October, indicating that macroeconomic challenges remain. On the external side, a sharp shift in the Fed's policy stance may take some time. In the short term, the market still needs to wait for a clearer catalyst.
Looking forward, we expect the market to maintain consolidation in the short term, digest domestic and foreign uncertainties, and wait for clearer policy signals and positive catalysts. Despite the recent rebound in the market, valuations remain attractive. We believe that the upside space at the current level is greater than the downside risk, and investors are advised to pay attention to potential catalysts. In the medium term, we judge that a reversal in the market may depend on the following two factors: 1) the Fed slows the pace of raising interest rates; and 2) there is clearer evidence that China's economic growth is emerging from the trough.
The main points of CICC are as follows:
Review of market trends:Although the US stock market weakened sharply last week, the overseas Chinese stock market rebounded against the trend. The growth sector and US-listed Chinese stocks led the gains, with the Hang Seng Technology Index up 15.6%. The dome MSCI China Index, the Hang Seng China Enterprises Index and the Hang Seng Index rose 10.7%, 9.0% and 8.7%, respectively. In terms of the sector, the media entertainment, optional consumption and daily consumption sectors led the gains, rising 17.7%, 16.9% and 10.9% respectively, while banking, utilities and energy lagged behind, with the banking sector falling 0.3%. Utilities and energy sectors rose only 0.4% and 0.7%, respectively.
Chart: the MSCI China Index rose 10.7% last week, led by the media entertainment and consumer sectors.
Chart: although the US stock market has fallen, the overseas Chinese stock market has rebounded sharply
Market outlook:The overseas Chinese stock market last week posted its biggest weekly gain since 2011. Even though the October PMI data were weaker than expected and the US stock market fell, the overseas Chinese stock market rebounded sharply last week as sentiment improved. Meanwhile, Bloomberg reported[1]It also confirmed that the US Public Company Accounting Oversight Board (PCAOB) had concluded its on-site audit of Chinese companies in Hong Kong, further boosting market sentiment.In our last weekly report, we pointed out that as valuations and market sentiment fall to low levels, the opportunities for the market outweigh the risks, and even a very small amount of optimism can trigger short covering and drive the market up sharply.Against this backdrop, it is not surprising that the market has rebounded strongly similar to the sharp fall at the beginning of the week before. Driven by high enthusiasm for trading, the average short selling ratio fell sharply to 15.1% last week, down from 21.8% in early October.
We believe that last week's market rally is a correction after the mood has fallen to the extreme level, whether there will be a more substantial catalyst in the future remains to be seen, which will be the key to the sustainability of the rebound.If a more substantial catalyst fails to emerge, it could end in vain, like many of the rallies of the past two years. CurrentThe Fed's monetary policy, China's growth repair, and the progress of China and the United States in the field of audit are the three main catalysts for the turnaround of the Hong Kong stock market.The possible improvement of any one of these factors will directly address one of the "triple pressures" currently suppressing the Hong Kong stock market, namely, the impact of Fed tightening on liquidity, weaker corporate earnings, and rising risk premiums. In the short term, the market still needs to wait for a clearer catalyst.
Domestically, manufacturing PMI fell to a contraction area in October, and macroeconomic challenges remained.Specifically, the rebound in the epidemic in some areas continued to be a drag on economic growth, with the official manufacturing PMI falling 0.9 percent month-on-month to 49.2 percent in October. The sub-index of new orders fell 1.7 percentage points from the previous month to 48.1 per cent, while the index of new export orders rose 0.6 percentage points, indicating that domestic demand is weaker relative to external demand. Looking forward, we believe that current fiscal and monetary policies may play a supporting role in China's economic growth, but a stronger economic repair still needs more catalysts, especially as the global economic slowdown weakens China's export momentum.
Externally, a sharp shift in the Fed's policy stance may take some time.Last week, the Federal Reserve announced a sharp increase in interest rates by 75 basis points, in line with market expectations. However, Federal Reserve Chairman Powell said at a news conference after the meeting that the Fed may push terminal interest rates higher than originally planned.[2]. After the announcement of this "hawkish" position, the US stock and bond markets both suffered a sell-off last Thursday, with the technology sector accounting for a relatively high Nasdaq index falling more than 3 per cent. The mixed report on the US labor market released on Friday added further uncertainty to the future policy path of the United States. It is unclear whether the Fed will slow the pace of rate hikes in December. Maintaining the "hawkish" stance of the Fed may lead to further tightening of financial conditions and increase volatility in the Hong Kong stock market.
Looking ahead, we expect the market to maintain consolidation in the short term.To digest the uncertainty at home and abroad and wait for clearer policy signals and positive catalysts. Despite the recent rebound in the market, valuations remain attractive.We believe that the upside space at the current level is greater than the downside risk, and investors are advised to pay attention to potential catalysts.In addition, we thinkQuality growth targets (partial consumption and the Internet) may be a better choice.In the medium term, we judge that a reversal in the market may depend on the following factors: 1) the Fed slows the pace of raising interest rates; 2) there is clearer evidence that China's economic growth is recovering.
Specifically, the main logic that underpins our point of view and the factors we need to pay attention to last week include:
1) the manufacturing PMI fell to the contraction area in October.In October, China's manufacturing PMI fell 0.9 percent month-on-month to 49.2 percent, below the market's median expectations. Manufacturing PMI fell lower in October as a result of a sharp month-on-month decline in the production sub-index and persistent sluggish demand. The sub-index of new orders fell 1.7 percentage points from the previous month to 48.1 per cent, while the index of new export orders rose 0.6 percentage points to 47.6 per cent, both of which continued to contract. The sub-index of supplier delivery time also fell 1.6 percentage points from the previous month to 47.1 per cent, highlighting the unsmooth supply chain. The recent rebound in many outbreaks continues to weaken domestic demand and affect production, and the postponement of construction activities in the context of the epidemic may also reduce the effectiveness of capital expenditure on infrastructure.
Chart: manufacturing PMI fell to contraction area in October
Chart: China's CPI growth rose, but core CPI growth slowed due to depressed demand.
3) Hong Kong has successfully hosted the Investment Summit of International Financial leaders.The Investment Summit of International Financial leaders, hosted by the Hong Kong Monetary Authority, was held in Hong Kong last week. The successful holding of the three-day summit marks the "return to the stage" of Hong Kong, which has gradually opened to the world since the epidemic. Li Jiachao, Chief Executive of the Hong Kong Special Administrative region, said in his speech that Hong Kong is still the only city in the world that combines the advantages of the world and China, and urged financial enterprises to strive for the best in the face of opportunities.[4]
4) the Chinese president met with German Chancellor Gerhard Schultz in Beijing.German Chancellor Schultz arrived in Beijing on Friday for talks with the Chinese president. According to the information released by the Ministry of Foreign Affairs[5]The chairman pointed out that German Chancellor Schultz's visit will enhance mutual understanding and mutual trust and deepen practical cooperation in various fields. China is willing to continue to deepen aviation cooperation with Germany and Europe, and carry out exchanges and cooperation on the prevention and control of COVID-19. We will strengthen exchanges and mutual learning around green development, ecological and environmental protection, and promote people-to-people exchanges.
5) the media reported that US auditors ended their audit of Chinese companies ahead of schedule.Bloomberg reported on Friday that US auditors ended their on-site audit of Chinese companies ahead of schedule, noting that the US Public Company Accounting Oversight Board (PCAOB) may submit a preliminary report on the results of the audit of Chinese companies in the coming weeks.
6) liquidity: market trading volume has increased significantly, and the scale of short selling has narrowed driven by optimism; the momentum of large southward capital inflows has not changed.Driven by optimistic market sentiment, the size of upper and short selling transactions fell sharply, with the average daily short selling ratio falling to 15.1 per cent. At the same time, the pace of southbound capital inflows accelerated further last week, with daily inflows averaging HK $6.7 billion.
Chart: southbound inflows continued last week, with foreign capital outflows (as of Wednesday)
Chart: the ratio of short selling of Hong Kong stocks fell sharply last week
Investment advice:Overall, we expect the market to continue to consolidate in the short term, but may also show resilience again at current levels. We advise investors to pay attention to potential changes in overseas and domestic policies, which are expected to be a catalyst for a market rebound. In terms of investment advice, given the current macro environmentWe believe that sectors that provide cash flow certainty will still be a good choice, such as dividend payments that bring certainty or predictability of operating cash flow.Therefore, we recommendHigh dividend targetSuch as some public utilities and energy sectors. In addition, we also recommend that attention be paid to the existence of discounts in valuations and the improvement of the regulatory environment.High quality growth plateSuch as automobiles, health care, parts of the Internet and consumer sectors.
Focus on events:1) China's economic growth and policy changes; 2) geopolitical tensions; 3) epidemic changes; 4) Sino-US relations.
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