Source: CICC strategy
Driven by positive factors such as improved global liquidity conditions and relatively active domestic economic activity during the Spring Festival, the overseas Chinese capital stock market got off to a good start after the holiday. Despite the lack of support for southbound capital inflows, improved market sentiment has attracted a massive return of overseas money. Overall, the two main factors driving the recent rebound in the market (the domestic economic repair and the slowing pace of Fed tightening) remain valid.
Domestically, during the first Spring Festival holiday after the epidemic policy was optimized, the pick-up in various consumer activities boosted market confidence in economic repair. Overseas, factors such as a slowdown in the pace of interest rate hikes by the Fed in early February and a continued decline in US inflation in the first quarter may further improve global liquidity conditions.
Looking forward, although there may be profit-taking volatility during the rebound, we believe that there is still room for the Hong Kong stock market to rise under the combined support of the above two factors.We judge that the pace of the rebound in the market is similar to the "three steps" and is currently at the second level.The first step is an improvement in risk appetite, and the rebound has been largely completed since November; the second step is for lower US bond interest rates to further repair valuations (which is ongoing); the third step is that corporate earnings may drive the market rebound after the second quarter of this year (depending on policy support to boost the consumer and real estate sectors).
In terms of allocation strategy, in addition to benefiting from favorable policies on consumption and real estate, we suggest that investors pay attention to three directions: the Internet and health care that are expected to be repaired by reversals, as well as high-tech hardware and software.
Review of the market trend
Driven by positive factors such as improved global liquidity conditions and relatively active domestic economic activity during the Spring Festival, the overseas Chinese capital stock market got off to a good start after the holiday. At the same time, improved market sentiment has attracted a massive return of overseas capital. Overall, the Hang Seng Technology Index rose 5.4 per cent in the only two trading days, while the Hang Seng SOEs, MSCI China and the Hang Seng Index rose 3.9 per cent, 3.2 per cent and 2.9 per cent respectively. On the sector, the media entertainment, optional consumer and information technology sectors led the gains, up 5.3%, 4.2% and 4.1%, respectively, while the telecommunications and utility sectors lagged behind, rising only 0.0% and 0.1%.
Chart: the MSCI China Index rose 3.2% last week, led by media entertainment and optional consumption.
Market prospect
Despite the lack of support for southbound capital inflows, the Hong Kong stock market remained strong during the Lunar New year holiday. The overseas Chinese stock market continued its excellent pre-holiday performance this week, which also confirms the point made in our report last November. We pointed out at the time that the most difficult time for the Hong Kong stock market was over with the easing of the "triple pressure"-monetary tightening by the Federal Reserve, weak growth in China and geopolitical tensions.
At the same time, on the positive side, we note that optimism among domestic and overseas investors is gradually accumulating. For example, the scale of overseas investors buying Hong Kong stocks is still increasing and pushing up the market after the suspension of trading in Unicom last week. According to EPFR, overseas active funds have flowed in for the third week in a row, and the size is also the highest since March 2021. Our recent report, "who is buying Hong Kong stocks?" "and" more support for overseas capital inflows "point out that if domestic fundamentals and corporate profits continue to repair, we expect a large-scale return of overseas capital in 2023.
Overall, the two main factors driving the recent rebound in the market (the domestic economic recovery and the slowing pace of Fed tightening) remain valid:
Domestically, during the first Spring Festival holiday after the epidemic policy was optimized, the pick-up in various consumer activities boosted market confidence in economic repair. A growing number of high-frequency data indicate that the domestic economy is gradually emerging from the short-term disturbances caused by the epidemic after a marked rebound in offline consumption (catering, entertainment and tax exemption) and travel (homecoming and tourism).
For example, during the past Spring Festival holiday, the number of domestic tourists increased significantly, with railways, roads, waterways and civil aviation sending about 180 million passengers, an increase of 67 percent over the same period last year and returning to 88.6 percent in the same period in 2019. At the consumer level, according to data released by the Hainan Provincial Department of Commerce, total sales of 12 duty-free shops on outlying islands in Hainan during the first five days of the Spring Festival holiday (January 21-25) were about $250 million, an increase of more than 20 per cent year-on-year.
At the same time, the total box office of domestic Spring Festival films reached 6.8 billion yuan, more than 6 billion yuan in the same period last year. Data such as hotel and restaurant bookings also performed better than in the same period last year. Finally, economic data released before the Lunar New year holiday, such as GDP in the fourth quarter of 2022 and retail sales of consumer goods and fixed asset investment in December last year, also show some signs of economic recovery. We judge that more positive policies are expected to be introduced this year to consolidate the upward trend of the economy.
Chart: the strong performance at the domestic box office during the Spring Festival this year also highlights the trend of recovery in consumption.
Overseas, factors such as a slowdown in the pace of interest rate hikes by the Fed in early February and a continued decline in US inflation in the first quarter may further improve global liquidity conditions. After the relatively optimistic performance of US CPI and PPI in December 2022 released earlier this year, the recently released core PCE data further reinforced the view that US inflation highs may have passed.
Interest rates on 10-year Treasuries recently fell back to around 3.5 per cent, prompting a rebound in overseas markets. Falling inflation and lingering fears of recession could force the Fed to slow the pace of monetary tightening at its next meeting and end the current cycle of rate hikes by the second quarter. We believe that this is expected to promote overall global liquidity easing and provide support for the performance of overseas Chinese stocks.
Chart: interest rates on 10-year Treasuries fall back to around 3.5%
Looking forward, although there may be profit-taking volatility during the rebound, we believe that there is still room for the Hong Kong stock market to rise under the combined support of the above two factors. We judge that the pace of the rebound in the market is similar to the "three steps" and is currently at the second step:
The first step is to improve risk appetite, and the rebound has been basically completed since November.
The second step is for downward interest rates on US debt to further repair valuations (which is ongoing)
The third step is that corporate earnings after the second quarter of this year may drive a rebound in the market (depending on policy support to boost the consumer and property sectors).
In the allocation strategy, in addition to benefiting from favorable policies on consumption and real estate, we suggest that investors pay attention to three directions: the Internet and health care that are expected to be repaired by reversals, as well as high-tech hardware and software.
Specifically, the main logic that underpins our point of view and the factors we need to pay attention to last week include:
1) in the first Spring Festival after the optimization of COVID-19 's epidemic policy, domestic consumption and tourism and other areas have picked up. After the optimization of the epidemic policy at the end of 2022, China's consumption and tourism industry showed a strong recovery, especially during the just-concluded Spring Festival, when the Ministry of Culture and Tourism data showed that 308 million domestic tourism trips were made, an increase of 23.1% over the same period last year. Domestic tourism revenue reached about US $55.5 billion, up 30 per cent from the same period last year. Among them, during the Spring Festival, the total sales of 12 duty-free shops on outlying islands in Hainan increased by more than 20% compared with the same period last year.
Chart: the high frequency data of domestic travel 21 days before the Spring Festival travel this year reflect the warming trend.
2) in January this year, local governments held two sessions, and the year-on-year GDP growth target for 2023 was between 4.0% and 9.5%. After weighted averaging the target growth rate of GDP in 31 provinces this year, we estimate that the target growth rate of national GDP is about 5.6 per cent. This means that this year's economic growth target set at the two sessions in March may be around 5%. Promoting steady economic growth and expanding domestic demand is likely to remain the main policy direction in 2023. Next, we suggest that investors pay close attention to the pace of economic stabilization policies. We judge that policies in the consumer, infrastructure and real estate sectors are expected to be effective.
3) PPI inflation in the United States fell further in December, and the Fed's rate hike may slow somewhat. Us PPI growth slowed to 6.2 per cent year-on-year in December (compared with 7.3 per cent in November). Inflationary pressures continue to weaken as the supply chain improves and energy prices fall. While Fed officials are still emphasizing the fight against inflation, they also hinted at a further slowdown in interest rate hikes. The fourth quarter of 2022 GDP in the United States at an annualized rate of 2.9% month-on-month, better than the market consensus, but December retail sales, industrial production, real estate sales and other data were lower than expected, with the recent concern about the US debt ceiling (debt ceiling) issue, the uncertainty of the US economic outlook has increased.
4) liquidity: last week, overseas active funds returned to the Hong Kong market for the third consecutive week. A total of $1.9 billion of overseas ETF funds flowed into the overseas Chinese stock market (including Hong Kong stocks and Chinese stocks) last week, while overseas active funds also bought about $800m of overseas Chinese stocks, according to data from EPFR. At the same time, trading of southbound funds was suspended during the Spring Festival.
Chart: last week, overseas active funds returned to the Hong Kong market for the third consecutive week.
Investment suggestion
On the whole, we believe that the market continues to rise in the twists and turns, domestic economic growth policy changes and the Fed policy path are worthy of attention. In terms of allocation strategy, we suggest that investors pay more attention to high-quality growth (low PEG), such as consumption and real estate under policy optimization, Internet and health care repaired by expected reversal, and high-tech manufacturing. We recommend that we overallocate some information technology (software and semiconductors), media entertainment, optional consumption and services, as well as some health care and real estate, and maintain a cautious view of raw materials, industry, transportation, public utilities, etc.
Edit / Corrine