The overall decline in the overseas Chinese stock market in the first two trading days after the Dragon Boat Festival last week was mainly due to concerns that uncertainty over FOMC interest rates suppressed market sentiment and uncertainties such as education regulation.

In addition, the relatively sluggish May economic data brought some drag. After the FOMC meeting, the Fed's dovish position on QE reduction and falling inflation expectations supported the market rebound, especially in the growth sector.

Looking ahead, China's "first-in, first-out" epidemic gradually returned to the new normal after the epidemic, and the overall economic growth momentum may gradually slow down. The latest economic data for May also show that domestic consumption is still relatively low and exports may gradually weaken and fall back. Therefore, in this context, we expect monetary policy to remain basically stable.

However, the overall downward and steepening of the interest rate curve of Chinese government bonds since the beginning of the year also reflects that the domestic bond market has begun to take into account the possibility of policy marginal relaxation. Externally, although the Fed's latest bitmap suggests that it is possible to raise interest rates in 2023, dove assets will still be maintained in QE reductions, which are expected to provide a relatively favorable environment for the growth sector.

In terms of operation, the relative balanced allocation between growth and value style may still be a reasonable choice in the short term. Specifically, we recommend over-allocation of information technology, high consumption, health care, partial manufacturing, energy and diversified finance, while underallocation of real estate, insurance and utilities.

Market review: after the Dragon Boat Festival holiday last week, overseas Chinese stocks lacked an obvious trend, mainly due to the relatively weak overall economic data, the uncertainty of education regulatory policies, and the fall in commodity prices caused by the hawkish bitmap of the FOMC meeting.

In this context, the growth style performed better, and Hang Seng Technology rose 0.6%. By contrast, the hang Seng china enterprises index fell 1.0 per cent, the MSCI china (- 0.9 per cent) and the hang Seng index (0.1 per cent) also fell slightly. In terms of the sector, the value and cyclical raw materials sector led the decline (7.0%), followed by utilities (- 4.1%) and real estate (- 3.9%); information technology (2.3%) and media and entertainment (0.3%) sectors performed better.

The MSCI China index rose 0.7% last week, led by telecom, optional consumer and energy sectors.

Market outlook:

Along with the A-share market, the overseas Chinese stock market fell back in the first two trading days after the Dragon Boat Festival holiday last week, mainly due to concerns that the uncertainty of FOMC interest rates suppressed market sentiment, as well as uncertainties such as education regulation. In addition, the relatively weak May economic data brought some drag, especially against the backdrop of stronger-than-expected PPI, widening scissors gap between PPI and CPI, weaker-than-expected TSF and negative corporate bond financing. Nevertheless, after the FOMC meeting, the Fed's dovish stance on QE reduction and falling inflation expectations supported the market rebound, especially in the growth sector.

Looking ahead, as we explained in "Hong Kong Stock Market Outlook for the second half of 2021: regaining the New economy", China's "first-in, first-out" epidemic gradually returned to the new normal after the epidemic, and the overall economic growth momentum may gradually slow down.

The latest economic data for May also show that domestic consumption is still relatively low and exports may gradually weaken and fall back. Therefore, in this context, we expect monetary policy to remain basically stable. However, the overall downward and steepening of the interest rate curve of Chinese government bonds since the beginning of the year also reflects that the domestic bond market has begun to take into account the possibility of policy marginal relaxation.

Externally, although the Fed's latest bitmap suggests that it is possible to raise interest rates in 2023, dove assets will still be maintained in the QE reduction, which is expected to provide a relatively favorable environment for the growth sector, not to mention its PEG is more attractive (PEG of Hang Seng Technology is 0.88x, gem 1.76x, NASDAQ 1.62x). In the short term, it is important to note that external fluctuations after the FOMC meeting may affect market sentiment, as well as regulatory uncertainty and Sino-US relations.

In terms of operation, the relative balanced allocation between growth and value style may still be a reasonable choice in the short term. Specifically, we recommend over-allocation of information technology, high consumption, health care, partial manufacturing, energy and diversified finance, while underallocation of real estate, insurance and utilities. At the same time, we also provide two industry configuration ideas: high quality (ROE vs. PEG) and Gaojing demeanor (capital expenditure).

The MSCI China index fell 0.9% last week, led by raw materials, utilities and real estate sectors.

Hang Seng Technology is still attractive in PEG

Specifically, the main logic that supports our point of view and the factors that need to be paid attention to this week include:

1) Economic data in May showed that growth slowed down and gradually returned to normal.

First, exports rose 27.9 per cent in May from a year earlier (32.3 per cent in April), but fell short of market expectations, mainly due to supply-side shocks such as commodity supply shocks. Imports rose 51.1% year-on-year (43.1% in April), the highest since January 2011. Second, industrial production rose 8.8 per cent in May from a year earlier, slightly higher than the expected 8.6 per cent, but slowed down from 9.8 per cent in April. The average annual compound annual growth rate over the past two years fell to 6.6 per cent from 6.8 per cent in April.

On the sector, utilities, mining and high-tech manufacturing remain strong. Third, consumption continues to pick up. Retail sales of consumer goods reached 3.6 trillion yuan, a year-on-year growth rate of 12.4 per cent from 17.7 per cent in April and an average annual compound growth rate of 4.5 per cent over the past two years. Fourth, fixed asset investment increased by 15.4% from January to May compared with the same period last year, but the month-on-month growth rate slowed to 0.17% from 0.93% in April. Among them, investment in manufacturing picked up moderately, but investment in infrastructure and real estate slowed.

It should be noted that PPI rose to a 13-year high. China's PPI surged 9 per cent in May from a year earlier (6.8 per cent in April), the highest in nearly 13 years, mainly due to soaring commodity prices caused by supply constraints and the continued recovery of the global economy from COVID-19. Meanwhile, CPI rose modestly by 1.3 per cent. Although the upstream cost rise continues to transmit downward, the PPI growth rate is further faster than the CPI growth rate, or can not be fully conveyed to the consumer side, so downstream profits may be further squeezed.

China's exports rose 27.9% from a year earlier, compared with a 32.3% increase in April.

China's PPI surged 9% in May from a year earlier, reaching a 13-year high

The scissors difference between PPI and CPI expands or squeezes the profits of downstream industries

Manufacturing investment rebounded moderately in May, while infrastructure and real estate investment slowed

2) China's credit has slowed and the net financing of corporate debt has turned negative.

The year-on-year growth rate of social finance slowed further to 11 per cent in May from 11.7 per cent in April, the slowest pace since February 2020, and the amount of new social financing was 1.92 trillion yuan, lower than market expectations. The slowdown in social finance growth is mainly due to the prevention of financial risks and the contraction of credit debt and corporate bond financing.

M2 rebounded to 8.3% year-on-year in May from 8.1% in April, easing some concerns about the accelerated pace of monetary policy tightening. Looking ahead, the CICC Macro team expects the year-on-year decline in TSF to narrow in the coming months and may stabilize and rebound in the fourth quarter of this year.

China's PPI surged 9% in May from a year earlier, reaching a 13-year high

3) China strengthens the supervision of private education.

The Ministry of Education has set up an extracurricular guidance office, which is mainly responsible for managing and supervising extracurricular guidance institutions, punishing illegal training activities and formulating relevant policies and regulations. Stronger-than-expected regulation has put pressure on Chinese education companies listed in the United States. Given that stricter controls are likely to be implemented in the future, the potential impact on the education industry deserves close attention.

4) southbound funds turned to net outflows, and overseas funds flowed into overseas Chinese stock markets for 42 consecutive weeks.

Last week, southbound capital changed from net inflow to net outflow on the fourth trading day after the Dragon Boat Festival, with an average daily outflow of about HK $640 million. On the contrary, as the dollar fell, overseas money flowed into the overseas Chinese stock market for the 42nd consecutive week. Last week, $180 million flowed into the overseas Chinese stock market from overseas funds, down from $670 million the week before.

Continued inflows from overseas for the 42nd consecutive week

Investment advice: as external and domestic uncertainties dampen market sentiment, we expect the market to consolidate in the short term. From a configuration perspective, we recommend a more balanced configuration between growth and value style.

Specifically, we recommend over-allocation of information technology, high consumption, health care, partial manufacturing, energy and diversified finance, while underallocation of real estate, insurance and utilities. In addition, we offer high quality (ROE vs. PEG) and magnificent demeanor (capital expenditure).

In the medium to long term, we believe that China will be the first to recover from the impact of the epidemic and return to normalization, which will prompt the market to refocus on the opportunities presented by China's inherent long-term structural trends, such as consumption and industrial upgrading, such as electric vehicles, new energy (including solar energy), technology hardware, semiconductors, high consumption and pharmaceutical biology.

Focus on events: 1) commodity prices; 2) overseas epidemic rebound and vaccine launch; 3) changes in monetary policy positions at home and abroad; 4) Sino-US relations.