The current stage: the decline of sovereign risk premium

1. The market in the first stage is reflected in the decrease of uncertainty caused by the event signal. On the epidemic prevention and control / real estate regulation and control optimization expectations, Hong Kong stocks start the current round of counter-offensive horn, underestimated short compression drive rebound.

We previously judged that Hong Kong stocks ushered in a period of strategic opportunity, which is more flexible than A-shares. The core observation elements for this year are two-the upward pressure on ① US Treasury interest rates has been alleviated (corresponding to US easing), and the domestic stable growth expectations of ② have been reunified (corresponding to improved earnings).

(1) from the point of view of the odds, the current indicators of the "bottom framework" of Hong Kong stocks are at a "more attractive" level than A shares. Important bottom signals such as the short selling ratio of Hong Kong stocks, the volatility of the Hang Seng Index and the size of buybacks are also at extremely satisfactory levels.

(2) from the perspective of the change of winning rate, Hong Kong stocks are more sensitive to "fundamental repair + top of US debt interest rate" than A-shares and are more flexible under more attractive odds.We believe that the fourth quarter is the best time to buy Hong Kong stocks.We suggest that we should attach importance to the strategic bottom of Hong Kong stocks, which is more flexible than A-shares, and that Hong Kong stocks take a bull market and A-shares repair market.

2. At present, the sentiment of Hong Kong stocks has improved, the ratio of short selling to trading and the CDS of Chinese sovereign bonds have dropped significantly-the sovereign risk premium has declined. Before this rebound, the odds are extremely attractive.

We proposed earlier thatOn October 31, 2022, Hong Kong stocks have bottomed out.According to the matching of the previous indicators of the Hang Seng Index when it reaches the bottom, the odds of Hong Kong stocks on October 31, 2022 are in the extreme position, which is extremely attractive. Specifically:

(1) the Hang Seng Index Forward PE is second only to the lowest level since the 2008 financial crisis. On October 31, 2022, the Hang Seng Index Forward PE was only 8.24 times.

(2) the short selling ratio of Hong Kong stocks reached the highest level since 2008. In the first ten days of October 2022, the short selling ratio of Hong Kong stocks was maintained at about 28%.

(3) the AH premium is at the highest level since 2008. On October 31, 2022, the AH premium reached 154.54.

(4) the price of China's five-year CDS is at an all-time high. On October 25th, 2022, China's five-year CDS rose to the highest level since March 16, reaching 133.44.

(5) the RMB exchange rate is in the depreciation channel. On November 4, 22, the midpoint of the US dollar against the RMB reached its highest level since 2008, reaching 7.26.

After a rebound since November, the current indicators of the Hang Seng Index have been repaired from the bottom of 22.10.31.Specifically:

(1) the Hang Seng Index Forward PE has been repaired. On November 17, 2022, the Hang Seng Index Forward PE was 10.05x.

(2) the proportion of short selling in Hong Kong stocks has dropped significantly from its all-time high in October. On November 17, 2022, the proportion of Hong Kong stocks oversold was maintained at about 19.3%.

(3) the AH premium has narrowed, and the AH premium has fallen sharply to 143.05 on November 17, 2022.

(4) the price of 5-year CDS in China fell sharply, falling to 83.6 on November 17, 2022.

(5) the pressure on the depreciation of the RMB has eased somewhat. On November 17, 2022, the midpoint of the US dollar against the RMB was 7.07.

The second stage of the expected relay in the future: value revaluation

The second stage of the relay is expected in the future: revaluation. It is reflected in the landing of policy regulation and control optimization / reinforcement under stable growth and stable employment. Based on the optimization of real estate regulation and control / epidemic prevention and control, the steady growth of the policy under the fall of external demand, and the enhancement of policy certainty in key sectors led to a rebound in valuations.

1. Give overall consideration to economic development and epidemic prevention and control.Epidemic prevention and control is expected to continue to optimize the recent "continuous optimization and improvement of epidemic prevention and control measures" frequent signals, economic development and epidemic prevention and control take into account, epidemic prevention and control is expected to continue to optimize.

11.5 the joint prevention and control mechanism of the State Council focuses on "constantly optimizing and improving epidemic prevention and control measures, improving the level of scientific and accurate prevention and control, and further coordinating epidemic prevention and control and economic and social development." "

11.10 the standing Committee of the political Bureau of the CPC Central Committee held a meeting to listen to COVID-19 's report on epidemic prevention and control work to study and deploy 20 measures to further optimize prevention and control work. 11.11 the Comprehensive Group of Joint Prevention and Control of the State Council issued the Circular on further optimizing COVID-19 epidemic Prevention and Control measures scientifically and accurately to do a good job in prevention and control work, announcing 20 measures to further optimize prevention and control work. The 20 measures focus on the optimization and accurate science of epidemic prevention policies, the bottom line of epidemic prevention is being guarded, and the efficiency of epidemic prevention is on the rise, further confirming the reunification of domestic expectations of stable growth.

2. There is a strong correlation between "stable employment" and "stable land production", and real estate needs to be further relaxed.

Historically, there is a strong correlation between non-manufacturing employment prosperity and real estate investment, and we believe that "stable employment" can not avoid "stable land production".

In the past three periods of high employment pressure, downward export growth and slow consumption repair (08.10-09.01, 15.02-15.05, 19.12-20.03) were accompanied by the real estate relaxation cycle. The current employment pressure or the biggest pressure in macroeconomic regulation and control. Under the top priority of "stable employment", real estate is the biggest breakthrough. If there is no significant improvement in real estate investment in the future, it is expected that the loose policy of real estate will continue to increase in the future.

We believe that the strength of the economic recovery depends on the extent of relaxation of property policy. Considering that the impact of this round of real estate has not been significantly improved on the government side, investment side, and employment side, we expect that the follow-up real estate policy will continue to increase.

3. Infrastructure and consumption promotion policies are important tools to hedge against the vivid downward trend in the economy.

Historically, weak domestic economies (PPI and export growth have turned negative at the same time), infrastructure investment or consumption-boosting policies have also been important hedges against vivid downward trends in the economy.

On the one hand, the counter-cyclical nature of infrastructure investment is still there, and if the subsequent optimization of epidemic prevention policies leads to a vivid recovery in the economy such as consumption, the pace of capital investment and project promotion may slow down accordingly; on the other hand, infrastructure will become the key to stabilize domestic demand; on the other hand, cars are often the key direction of promoting consumption policies, which are expected to boost domestic demand.

4. The policy certainty of key sectors has been improved.

Recently, telecom operators have carried out strategic cooperation with Internet companies or set up a new mixed reform company, and the pharmaceutical collection policy has ushered in marginal changes. After the continuous landing of policies on key industries since mid-2021, coupled with stable employment guidance, companies in the core areas of Hong Kong stocks are expected to achieve "standardized development".

Three stages: cashing in profits

Three stages: cashing in profits. Reflected in the economy ushered in a repair opportunity, macro to micro transmission, earnings expectations will also lag to follow the upward revision, promoting the index to continue to rise.

We previously proposed that the 11.10 meeting on the optimization of epidemic prevention and control signals superimposed the traders Association to continue to promote and expand the bond financing support tools of private enterprises, including real estate enterprises, to support bond financing of private enterprises, which is expected to improve the credit and profit expectations of the ah share market.

When we look back at the four significant rises in Hong Kong stocks since 2008, we all need strong profit support.

In addition, we have previously suggested that Hong Kong stocks are more sensitive to earnings and tend to be more flexible than A-shares. Therefore, the continuous optimization of epidemic prevention and control + stable growth policy is expected to set a more positive tone.In the medium to long term, we are bullish on the certainty trend of the domestic economy and the rebound in profits of Acord H, and Hong Kong stocks are expected to get out of a better market.

The economy ushered in the opportunity of repair, macro to micro transmission, earnings expectations will also lag behind to follow the upward revision, thus bringing the third wave of profit-driven market of Hong Kong stocks.Historically, the Hang Seng Index has consistently predicted that the upward revision of EPS in December tends to lag behind that of PMI.

Short-term, currently in the second half of the first wave of the market, short-term may enter a period of repair

1. The current valuation level of Hong Kong stocks is in place in stages under the condition that the fundamentals have not been confirmed.

As of November 17, the Hang Seng Index unanimously forecast that the price-to-earnings ratio would be revised to 10.1x. It is roughly similar to the valuation center of our equity risk premium model based on the current situation.

We talked earlier that multiple bottom signals show that Hong Kong stocks have bottomed out. As of 2022.11.17, the Hang Seng Index has rebounded by about 22.9% from the bottom, while Hang Seng Technology has rebounded by 30.5%. Historical experience shows that the Hang Seng Index risk premium model fits well, based on which we can calculate the central theoretical value of Hang Seng Index Forward price-earnings ratio under different risk-free interest rates and PMI.

The model shows that the current valuation of Hong Kong stocks has been periodically repaired to the central level under the condition that the fundamentals have not yet been confirmed. Given that the yield of 10Y US debt is 3.8%, in the case of expected improvement, the relatively optimistic PMI is 52, and the center of the consistent forecast price-earnings ratio of the Hang Seng Index given by the model is 10.2x.

2. The volatility of the market will increase.

Looking back at the bottom reversal of Hong Kong stocks in the past 10 years (October 11, February-April 16, October-December 18, March-April 20), the first wave of the market often rebounded to the valuation center suggested by the model.

• Rebound in 2011: PMI is around 50, 10Y yields around 2.3%, and the Hang Seng Index unanimously expects PE to rise to 10.78 (the hub is 10.8).

• Rebound in 2016: PMI is near 50, 10Y US bond yield is 1.9%, and the Hang Seng Index unanimously forecasts that PE will rise to 11.6 (slightly more than Hub 11.3).

• Rebound in 2018: PMI is near 50, with 10Y Treasury yields at 2.9%. The Hang Seng Index unanimously expects PE to rise to 11.3, before falling back to around 10 times (the model recommends a valuation center of 10.1).

• The market fluctuated higher after the rebound in 2020, and from the hub of a few months after the rebound, PMI was near 51, 10Y US bond yields remained low at 0.7%, and the Hang Seng Index unanimously predicted that PE would continue to rise to 13.4 from the end of the year to November (the model recommends a valuation hub of 13.9).