Source: Dang Chongyu Investment Notes

Author: Dr. Dang Chongyu, Chief Overseas Strategy Analyst of Guohai Securities

Core views

Recently, the rise in Hong Kong stocks represented by Hengke attracted attention - on March 23, the Hang Seng Index, the Hang Seng Composite Index, and the Hang Seng Technology Index rose 2.34%, 2.30%, and 4.74% respectively. The main reasons are:

(1) Denominator side: Recently, due to financial market concerns about overseas financial risks, the market anticipated the timing of the Federal Reserve's interest rate cuts ahead of schedule, which is particularly conducive to a rebound in growth stocks represented by Hang Seng Technology; even if the timing of interest rate cuts is uncertain, expectations of interest rate hikes weaken and come to an end, which is conducive to improving the China-US dollar spread problem.

Whether it's the collapse of the US Bank of Silicon Valley or the Credit Suisse crisis of one of the world's 30 systemically important banks (G-SIBs), the financial market has raised concerns about future financial risks in Europe and the US. According to CME data, as of 2023/3/23, the market expects the Federal Reserve to cut interest rates starting in July, and that the federal funds target interest rate will drop to 4%-4.25% by the end of 2023.

We believe that the crisis of small to medium banks in the US still exists. Overall, deposits on the debt-side of Bank of America have been lost recently. Depositors may prefer to choose the IMF or transfer their deposits to big banks, etc.; on the asset side, due to mismatched terms, the depreciation of the assets held has increased the vulnerability of the US banking system.

(2) Molecular side: Recently, some Hang Seng Technology companies announced their results, and Tencent's performance exceeded expectations.

For example, Tencent Holdings' net profit for the fourth quarter of 2022 was 29.711 billion yuan (non-IFRS), a year-on-year increase of 19%. After five quarterly adjustments, it returned to double-digit growth. Among them, as of the end of the fourth quarter of 2022, the combined monthly active users of WeChat and WeChat reached 1,313 million, an increase of 3.5% over the previous year.

At the same time, domestic game versions were distributed normally on March 23. A total of 86 games received game numbers. Among them, Tencent's “Last Sword” and NetEase's “Mission Zero” were approved. Game versions continued to be distributed, improving the market's view of future Internet companies' game business.

Furthermore, GPT-4 and Baidu's “One Word of Wen Xin” have recently been launched one after another, and the main stock market line represented by AI has driven the overall performance of the A-share and Hong Kong stock TMT sectors.

We believe that Hong Kong stocks may rebound in the second quarter. In particular, in the middle to late of the second quarter, Hong Kong stocks entered the layout period in April. The reasons are as follows:

(1) We believe that the Fed's interest rate hike will gradually come to an end. Even if it remains to be seen when interest rate cuts will begin, it may still be beneficial to ameliorate the China-US dollar spread.

The Federal Reserve will face a dilemma. On the one hand, concerns about the risks of the banking system caused by the collapse of banks in Silicon Valley have not been resolved, and the crisis of small and medium banks in the US still exists, and interest rate hikes are not conducive to controlling financial risks; on the other hand, although US inflation continues to fall from a high point, the pace of decline is unclear. Inflation in February was still at a high level, and the Fed's interest rate hike may not have completely ended.

We believe there is still a possibility that the Federal Reserve will cut interest rates in the second half of this year. Assuming that the view that interest rate cuts will only begin next year needs to be taken into account that the Federal Reserve may continuously adjust monetary policy based on the evaluation of financial risks and economic data, the Fed's current principles and opinions do not represent the market's consistent expectations for future results.

(2) We believe that China's economy will continue to resume growth in the second quarter, and because of the low base of China's economic growth in the second quarter of last year, the actual growth rate of China's GDP in the second quarter of this year is likely to increase year-on-year.

Economic data for January-February confirmed expectations of China's economic recovery. In January-February, the company had zero growth of 3.5%, up from -1.8% in December of the previous year, fixed asset investment increased 5.5% year on year, 0.4 percentage points higher than the full-year growth rate of last year, and the value added of industries above scale increased 2.4% year on year, up 1.1 percentage points from the monthly growth rate in December of the previous year. It can be seen that production demand recovered to a certain extent in January-February.

The forward-looking trend of BCI Chinese corporate profits jumped from 38.86 in December last year to 58.72 in February 2023. We found that the index fluctuated in the same direction as the Hang Seng Index, except that in addition to profit factors, Hong Kong stocks were more likely to be affected by factors such as overseas financial risks and geographical tension.

Due to the low base effect, we believe that the year-on-year growth rate reading of the Chinese economy in the second quarter may rebound significantly. Currently, Wind expects the economy to grow 7.4% in the second quarter.

(3) The Hang Seng Index has strong support around 19,000 points.

The central low of the Hang Seng Index in December last year was also roughly around 19,000 points. At that time, the epidemic prevention policy had just begun to be optimized. Although the Hang Seng Index had a strong rebound since the end of October, it did not fully reflect profit expectations and valuation repairs. Therefore, we think that around 19,000 points is a relatively safe position, and there is limited room for downward movement.

Recently, some financial weighted stocks have been affected by risk events in overseas banks, but some internet stocks, which are also weighted stocks, have begun to rebound.

(4) The uncertainty of the disclosure of the Hong Kong stock chronology will gradually fade away, but we still need to pay attention to the impact of the disclosure of A-shares and Hong Kong stock quarterly reports in April.

It is expected that most of the 2022 annual reports of Hong Kong stocks will be disclosed before the beginning of April. According to 2022 data, in the Hang Seng Composite Index, about 83% of listed companies' 2021 annual reports were disclosed in March 2022. Therefore, the impact of the 2022 annual reports on Hong Kong stocks may decrease after March this year, but it is still necessary to pay attention to the impact of the disclosure of the Hong Kong stock's 2023 quarterly report on the Hong Kong stock market in April and May.

The disclosure of A-shares quarterly reports in April may also have an impact on Hong Kong stocks. If A-shares are trending normally due to uncertainty, it is not conducive to driving Hong Kong stocks in a positive direction, because there is currently no logic for AH to rotate across markets.

(5) It is not ruled out that important meetings in April may have favorable policies.

The Politburo meeting in April 2022 proposed “it is necessary to step up macroeconomic policy adjustment, stabilize the economy steadily, strive to achieve the expected goals of economic and social development throughout the year, and keep the economy running within a reasonable range”. It also proposed that “every effort should be made to expand domestic demand, play the key role of effective investment, strengthen land, energy use, EIA, etc., and comprehensively strengthen infrastructure construction”. It also stated that “it is necessary to promote the healthy development of the platform economy, complete special rectification of the platform economy, implement normalized supervision, and introduce specific measures to support the standardized and healthy development of the platform economy”.

We believe that although the economy continues to recover, if the pace of economic recovery falls short of expectations, it is not ruled out that the Politburo meeting in April this year may have favorable policies.

We are optimistic about the rebound of Hong Kong stocks in the second quarter. In particular, in the middle to late of the second quarter, Hong Kong stocks entered the layout period in April:Given that factors such as overseas financial risks, the disclosure season for A-shares and Hong Kong stock reports, the March mainland economic data and the empty window period for new policies may still have some impact on Hong Kong stocks as a whole, we think that the rebound in Hong Kong stocks in the second quarter will not be too early or too hasty; of course, the precondition for a rebound in Hong Kong stocks in the second quarter is that although the global geography is tight, the pace and influence are manageable.

Risk warning:The risk of an overseas recession exceeded expectations; the fall slope of US inflation fell short of expectations; changes in global monetary policy exceeded expectations; domestic economic recovery fell short of expectations; and changes in the international geopolitical situation exceeded expectations.

Editor/phoebe