Review of the market trend

The overseas Chinese stock market continued to strengthen last week, mainly due to continued optimism, record southbound capital inflows, good forecasts for some banks and Mr Biden's new stimulus package.

Overall, due to the relatively high share of the financial sector, the state-owned enterprise index rose 3.3 per cent, the best performance, followed by the Hang Seng Index\ MSCI China and Hang Seng Technology, up 2.5 per cent 1.7 per cent and 0.8 per cent respectively. At the sector level, the media and entertainment sector rose 8.5%, followed by energy (7.7%), insurance (6.6%), telecommunications (5.7%) and banking (5.5%). In contrast, daily consumption (- 5.1 per cent), materials (- 3.1 per cent) and IT (- 2.8 per cent) lagged behind.

The MSCI China index surged 1.7% last week, led by media, entertainment and energy sectors.

Market prospect

Since the beginning of the year, southbound inflows have continued to be active and record-breaking, continuing to push Hong Kong stocks stronger last week. At the same time, the boost of improved earnings to some "backward value sectors" such as banking and insurance also supported the market performance. The recent strong upward momentum in the market confirms our view that our outlook and policy are gradually turning in 2021 and that the structure is still positive.

look forward,We remain optimistic, mainly due to the continued improvement in market liquidity and the continuous repair of China's growth.(such as strong export data and corporate profits), andA new round of stimulus measures in the United States。However, in the short term, we also suggest signs of overbuying or even excitement in some parts of the market.For example, the market has entered a technical overbought range, the proportion of short selling transactions has fallen to its lowest level since 2018, and the seemingly strong southbound funds are mainly "huddled" in the first 4-5 stocks. Therefore, we would not be surprised if the short-term market "take a break" and then go up, but the long-term upward trend is still established.

MSCI China Index is in the technical overbought range.

The proportion of short selling fell to its lowest level since 2018

In this context, we continue to recommend a balanced allocation of new and old economic sectors and focus on structural opportunities, that is, to select sectors with profit certainty that benefit from strong export and consumption recovery, as well as some cyclical sectors. Specifically, the main logic that supports our point of view and the factors that need to be paid attention to this week include:

1) gradual normalization of policies: overall credit in China12Monthly slowdown

China extended 1.26 trillion yuan in new renminbi loans in December, up 120 billion yuan from the same period last year, mainly due to a sharp increase in discounted financing for bills in the corporate sector due to liquidity demand at the end of the year.

However, compared with new loans that were basically in line with expectations, the increase in social finance decreased by 383 billion yuan to 1.72 trillion yuan compared with the same period last year, down to 13.3%, which was lower than expected, mainly due to the drag of credit debt issuance and trust loans. considering that most of these non-standardized assets flow to real estate, it cannot be ruled out that it is related to the tone of policy normalization.

Looking ahead, we expect policy normalization to continue, but the CEWC and the 2021 working meeting of the central bank indicate that there will be no sharp turn. Therefore, a sound policy stance and reasonable liquidity are still market-friendly.

Social finance continued to add 1.72 trillion yuan last month, but the growth rate slowed down.

2) growth repair continues: exports maintain strong growth,PPIDeflation alleviation

Due to the severe overseas epidemic, the resumption of work was blocked and demand was strong, making China's exports continue to show resilience in December, up 18.1% from a year earlier (21.1% in November).

In terms of sectors, the speed of epidemic prevention materials and household supplies has slowed, while the export growth of audio and video equipment, integrated circuits, household appliances, medical equipment and automation equipment is accelerating.

Looking back at 2020, Chinese exports grew 3.6 per cent year on year, with exports to the US particularly strong (vs. 0.5 per cent year-on-year growth in 2019). Imports fell 1.1% from a year earlier, and the trade surplus reached 535.03 billion US dollars, the highest level since 2015. It has also become an important pillar supporting China's economic growth in 2020.

Looking ahead, given the introduction of a new round of US stimulus and the likely slow resumption of work, we expect exports to remain strong in the last quarter or two. In this context, the beneficiaries of strong export demand for cars and parts, furniture, household appliances and electronic products are still worthy of attention.

China's exports continued to show resilience in December, up 18.1% from a year earlier.

In December, the year-on-year growth of CPI was positive, and the decline of PPI continued to narrow.

3) liquidity continues to improve: continuous overseas funds20Weekly inflow and southward inflow hit a new high

Last week, overseas money flowed in for the 20th consecutive week and further expanded to $2.35 billion. More significantly, southbound weekly capital inflows broke the record again, reaching HK $70.2 billion, while net daily purchases of HK $19.5 billion were also the highest since its inception.

Since the beginning of 2021, southbound capital has flowed a net HK $135.7 billion, equivalent to 20 per cent of the inflow for the whole of 2020. However, the strong inflows of HK $135.7 billion so far this year are very concentrated, with the top five companies (including Tencent, China Mobile Limited, CNOOC, Semiconductor Manufacturing International Corporation and Meituan) totaling HK $100 billion.

In the long run, we expect long-term structural southward capital inflows to remain strong, with about HK $2000 to HK $400 billion a year over the next three to five years, thanks to the diversification of asset allocation by Chinese households and increased issuance of mutual funds. and the growing growth of new economy companies in the Hong Kong market to enhance their long-term attractiveness.

Overseas funds have maintained the inflow momentum for 20 consecutive weeks.

4) concernFY20 / 4Q20Profit forecast of

Although the official earnings season in fiscal year 2020 or the fourth quarter will not begin until the end of February, the company will gradually issue profit forecasts from now on, and potential forecasts will become a major factor affecting price performance. for example, the good performance forecasts of some banks (Bank of Shanghai and Industrial Bank) last week supported the stock price performance. According to Factset's profit forecast, MSCI China's overall EPS growth rate is likely to reach 26.3% year-on-year in the fourth quarter of 2020.

From an industry perspective, utilities, energy, health care and materials are expected to recover significantly, and we recommend that investors pay close attention to earnings forecasts, especially potential surprises.

Market consensus forecasts show that the MSCI China Index expects earnings growth of 18.4% in 2021.

5) external uncertainty still exists

On Friday, nine more companies were added to the existing list of banned US investors, causing individual stock prices to fluctuate.

We believe that although the impact may be short-lived and mainly at the emotional and liquidity level, it will still have a financial impact if it is also removed from the index by reference to previous experience of MSCI / FTSE. However, we do not believe that the above noise will completely reverse the trend, mainly because US investment shareholding is not high and there may be policy changes after the new president takes office.

Investment suggestion

We continue to be optimistic about the overall market in the medium to long term, but the recent partial euphoria is worthy of attention. In this context, we still recommend a balanced allocation between the new and old economies.

We are bullish on the beneficiary sectors of strong export demand and consumption (i.e. automobiles and spare parts, furniture, household appliances, automation equipment and electronics), cyclical sectors that benefit from the recovery in economic activity (i.e. raw materials, chemicals and energy), and some backward value stocks whose earnings may improve significantly.

The valuation differentiation between new and old economic sectors is still obvious.

Liquidity and market sentiment

The overall liquidity of the market continued to improve last week:

1）Overseas funds continue to flow in for 20 weeks.

2）Southward inflows increase to an all-time high

3）The proportion of sales in Hong Kong rose to 12%.

Focus on events

1）Sino-US relations

2）China's economic data and policy changes

3）The epidemic rebounded in some areas and vaccine research and development.