Review of the market trend

The overseas Chinese stock market fell sharply last week, mainly due to concerns about domestic economic growth caused by the signal of the State Council to lower the reserve requirement, and increased regulatory uncertainty of overseas-listed Chinese companies.

Overall, the Hang Seng Technology Index led the decline, falling 5.8 per cent, while the Hang Seng China Enterprises Index, MSCI China Index and Hang Seng Index fell 5.1 per cent, 4.6 per cent and 3.4 per cent respectively.

Sub-sector, in addition to raw materials and capital goods, other sectors have declined, of which the growth sector is particularly seriously affected by regulatory uncertainty. Specifically, the media entertainment, optional consumption and health care sectors led the decline, falling by 6.6%, 5.7% and 5.2%, respectively.

Market prospect

From the perspective of market performance, the reason why the Hong Kong stock market was heavily under pressure and lost to A shares and overseas markets last week was mainly due to the rise in regulatory uncertainty to suppress the Internet sector of Hong Kong stocks, while the sudden release of reserve rate reduction signals triggered market concerns about domestic economic growth and led to pressure on financial stocks, which are precisely the weight plates of the Hong Kong stock market, so the drag from the overall market and index level is even more significant.

On the one hand, the State Council suddenly hinted at a cut in reserve requirements on Wednesday and the people's Bank of China officially announced a cut in the required reserve ratio on Friday. As we analyzed in "prospects for Hong Kong stocks in the second half of 2021: picking up the New economy", domestic policies will be stable and looser in the context of slowing economic growth, which in turn supports our judgment that we are optimistic about growth stocks, but the time of this cut is still significantly earlier than expected.

That is why the A-share and H-share markets reacted strongly to the RRR cut last week, such as sharp falls in banks and cyclical sectors, and the yield on 10-year Chinese government bonds fell below 3% for the first time since the outbreak. this is mainly because investors are worried about whether the unexpected cut implies whether there is a significant "information gap" between the market and policy makers on the outlook for economic fundamentals.

However, despite the unexpected market expectations, going back to the policy itself, the 50 basis point cut is still clearly beneficial to the overall macro and market liquidity, and we expect the policy to release about 1 trillion yuan (although some of the money may be used to replace maturing MLF loans).

The financial data released on Friday also exceeded market expectations. New renminbi loans, the stock of social finance and M2 growth all exceeded expectations in June, suggesting that credit in China has not tightened as expected, although weak M1 growth may still indicate pressure at the corporate level.

In addition, an across-the-board RRR cut will also help partially alleviate China's current structural inflationary pressures and weak downstream demand.

The cut shows that policy makers are turning their attention to the challenges facing economic growth and suggests that domestic liquidity will ease steadily. The June inflation data released last week showed that the scissors gap between PPI and CPI was still at an all-time high, while PPI fell more slowly from a year earlier.

The high PPI-CPI scissors gap may squeeze the profits of the downstream industry, which may also be one of the reasons behind the cut. Therefore, on the whole, this cut and the recent indemnificatory rental housing policy show that the support at the policy level is gradually increasing.

On the other hand, the growth targets of overseas Chinese stocks, especially the platform economy, will still face regulatory pressure.

Last week, the CSRC and the Internet Information Office announced that they would step up supervision over overseas listed Chinese companies, hitting the technology and growth sector leaders of overseas Chinese stocks, which can also be reflected by the large southward capital outflow last Monday. the outflow exceeded HK $10 billion that day, the largest one-day net outflow since early March.

While regulatory policy is still the biggest uncertainty facing overseas Chinese stocks, the target of growth remains attractive in the long run. After the recent correction, the current PEG of the Hang Seng Technology Index is 0.88, which is attractive compared with the A-share gem Index and the NASDAQ market.

Moreover, the regulation of overseas listings of Chinese companies has increased the attractiveness of the Hong Kong market. Last week, HKEx announced that the IPO settlement cycle would be shortened from five days to two days. We believe that this move is expected to further enhance Hong Kong's competitiveness against NASDAQ.

Looking ahead, the June and second-quarter economic data to be released this week will further show the overall growth trend of China's economy. CICC Macro expects China's GDP growth to slow to 7.6 per cent in the second quarter from 18.3 per cent in the first quarter.

Overall, we maintain our previous judgment that slower economic growth and domestic liquidity easing will be good for China's growth sector.

Judging from the historical experience of previous RRR cuts, we have noticed that in the three months after the RRR cut, the new economic sector outperformed the old economic sector on average, and the Hong Kong stock market usually performed well. In terms of risk, the strengthening of local government financing supervision and its impact on credit risk are also worthy of close attention.

In terms of investment advice, after the recent sell-off, we recommend a balanced allocation of growth and value in the short term, and an appropriate tilt to the growth sector. However, in the environment of rising regulatory uncertainty, investors need to carefully grasp the opportunities within the growth sector.

Specifically, we propose to overallocate information technology, consumption, health care, some manufacturing, oil and gas, and diversified finance, while underallocating real estate, insurance and public utilities.

The main logic and major changes that underpinned our view last week are as follows:

1) Macro: the growth rate of PPI remained high in June, and the scissors gap between PPI and CPI was still at an all-time high. China's PPI growth slowed slightly to 8.8 per cent in June from 9 per cent in May. Overall CPI also fell slightly from 1.3 per cent to 1.1 per cent, mainly due to low pork prices.

Despite a pullback in commodity prices last month, PPI remains high. Itemized, the mining industry and raw materials in the PPI means of production increased by 35.1% and 18% respectively last month compared with the same period last year (down slightly from 36.4% and 18.8% in May).

The scissors gap between PPI and CPI remained at an all-time high of 7.7 per cent in June. In the report "prospects for Hong Kong stocks in the second half of 2021: regaining the New economy", we pointed out that the widening scissors gap between PPI and CPI may squeeze the profits of downstream enterprises, especially in the context of the current downturn in consumer demand.

Financial data exceeded expectations in June.

Specifically, new yuan loans reached 2.12 trillion yuan in June, up from 1.5 trillion yuan in May. Household loans climbed from 623.2 billion yuan to 868.5 billion yuan, while corporate loans increased sharply from 805.7 billion yuan to 1.46 trillion yuan.

The increase in the scale of social integration climbed to 3.67 trillion yuan in June from 1.92 trillion yuan in May, and the stock of social integration increased by 11% compared with the same period last year. M2 increased by 8.6% compared with the same period last year. However, the weak growth rate of M1 is still a cause for concern.

2) the central bank cut reserve requirements across the board to support economic growth.

At a meeting of the State Council on July 7th, the State Council pointed out that the people's Bank of China may cut the required reserve ratio in order to boost economic growth, which exceeded market expectations. Since then, the central bank reacted quickly, announcing an across-the-board reserve requirement cut of 0.5 percentage points on Friday.

This cut will inject 1 trillion yuan of long-term capital into the banking system, but we expect some of the money to be used to replace maturing MLF.

In the context of slowing domestic economic growth, the central bank's reserve cut may mean that monetary policy is gradually turning loose, especially when small and medium-sized enterprises are facing upstream cost pressure.

In the report "prospects for Hong Kong stocks in the second half of 2021: regaining the New economy", we proposed that policies may be stable and looser under the pressure of domestic growth, creating a favorable environment for the growth sector. Historically, the new economy sectors of A-shares and overseas Chinese stocks usually perform better than the old economy after the cut.

3) regulators strengthen the supervision of overseas listed Chinese-funded enterprises.

Last week, the Securities Regulatory Commission and the Internet Information Office announced that they would step up supervision of overseas-listed Chinese companies. According to data from Wande Information, 36 Chinese companies have landed in the US stock market since the beginning of the year, raising a total of $13.7 billion.

We believe that the regulatory level may further clarify data regulatory rules and other regulatory policy changes for overseas-listed Chinese companies. Looking ahead, we believe that regulatory uncertainty will drive companies to other markets, and HKEx is expected to be the main beneficiary.

The HKEx recently announced a series of improvements to the IPO mechanism and shortened the IPO settlement cycle from five days to two days from the fourth quarter of 2022, further enhancing the attractiveness of the Hong Kong market.

4) the daily outflow of southward funds reached the highest level since March, and the momentum of overseas capital inflows has also slowed down. The average daily outflow of southbound funds last week was HK $2.7 billion, up from HK $2 billion the previous week.

Southbound outflows reached HK $10.9 billion last Monday, the highest level since March. Southbound funds returned to inflows on Friday. Overseas money continued to flow into the overseas Chinese stock market last week, although inflows fell to $190 million from $1 billion the week before.

Investment suggestion

As uncertainty at home and abroad weakens market sentiment, we expect volatility in the short term, especially before the release of GDP data.

Therefore, we still recommend a balanced configuration, which can be appropriately tilted to the growth plate. In the environment of increased regulation, investors need to choose the specific sectors of investment carefully.

We recommend over-allocation of information technology, high consumption, health care, partial manufacturing, oil and gas and diversified finance, as well as low-allocation real estate, insurance and public utilities.

In the long run, we believe that China's "first-in, first-out" and return to the new normal after the epidemic will push the market to refocus on the investment opportunities brought about 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 medical biology.

Focus on events

1) Trade, fixed assets and retail sales data for June and GDP growth data for the second quarter

2) the regulatory changes faced by Chinese-funded enterprises listed overseas

3) the rebound of COVID-19 epidemic situation in individual areas and the progress of vaccination

4) the change of monetary policy position at home and abroad.

5) Sino-US relations.