Source:The study of CITIC

As overseas risks fluctuated in February 2023, the Hong Kong stock market fell significantly due to the strengthening expectations of the Federal Reserve's monetary tightening and geopolitical risk concerns. Looking forward to March, it is expected that the fundamental recovery trend will remain strong, and the two sessions will soon bring market confidence to the reform of the Hong Kong stock market; however, the expectation that the stronger momentum of US economic growth will bring liquidity tension, as well as frictions in Sino-US relations, may continue to disturb Hong Kong stock valuations in the short term.

However, combined with the current relative valuation advantage of Hong Kong stocks (dynamic PE:9.5x) and the higher earnings growth forecast for 2023 (17%), we believe that the allocation value of the Hong Kong stock market is still very significant.

In March, Hong Kong stocks suggested to focus on three main lines: 1) the consumer and real estate industry chain with sustained strong recovery; 2) telecom operators with high prosperity and strong performance certainty; and 3) high-quality targets with high dividends.

▍ February external risk disturbance, Hong Kong stock market sentiment weakened.

The Hong Kong stock market fell significantly in February, affected by the strengthening expectations of the Fed's monetary tightening and geopolitical risk concerns. From January 30 to February 27, the Hang Seng Index, the State-owned Enterprises Index and the Hang Seng Technology Index fell by about 12.1%, 14.2% and 17.1% respectively. Higher-than-expected US employment and inflation data led to higher expectations of Fed interest rate hikes, with the dollar index rising 3.3 per cent.

From a sub-industry point of view, external risks suppressed Hong Kong stock market sentiment in February, while the growth sector, which rose higher in the previous period, also fell sharply recently, while the defensive sector performed relatively well. Defensive communications, compulsory consumption, utilities, and energy sectors that benefit from high energy prices and the theme of energy security are relatively strong.

Looking back, high-frequency tracking data show that the domestic fundamental recovery trend is still very strong, but expectations that the stronger momentum of US economic growth will lead to tight liquidity, as well as frictions in Sino-US relations, may continue to periodically disturb Hong Kong stock valuations. However, combined with the current relative valuation advantage of Hong Kong stocks (dynamic PE:9.5x) and the higher profit growth forecast for 2023 (17%; CITIC's research department calculated based on Bloomberg consensus expectations), we believe that the allocation value of the Hong Kong stock market is still very significant.

▍ domestic: the fundamental recovery trend is still strong, the two sessions will soon bring confidence to the Hong Kong stock market reform.

High-frequency data after the Spring Festival show that the fundamental recovery trend is still very strong, there is no need to worry about sustainability. The subway passenger volume of the 12 sample cities we followed continued to soar after the Spring Festival. the current average subway passenger volume on the 7th is about 63.2 million, which is about 13% higher than that of the same period in 2019. From the perspective of civil aviation travel, the overall flight recovery of civil aviation after the Spring Festival has exceeded 80% of that of the same period in 2019; for hotels, various indicators have exceeded the level of the same period in 2019, and the pace of recovery has exceeded market expectations. In terms of real estate sales, as of February 17, the 42 new housing sample cities tracked by the real estate group of CITIC Research Department had accumulated 216000 net visas, down 20.9% from the same period last year. 14 second-hand housing sample cities accumulated 88000 net visas, an increase of 27.0% over the same period last year. The performance of new and second-hand houses is significantly better than that of the whole of 2022 (down 30.4% and 9.9%, respectively).

The two sessions of the Central Committee will be held soon, and we expect that the two sessions will continue to convey the policy will to stabilize growth and boost confidence, and expect security, science and technology, or two key keywords. The key words for the reform of "science and technology" may be mainly related to high-tech industries such as semiconductors, Xinchuang and digital infrastructure, while "security" may be mainly related to energy and food.

In addition, the China Securities Regulatory Commission has issued the pilot measures for the Administration of overseas issuance and listing of domestic Enterprises (hereinafter referred to as the "measures") and five supporting guidelines, which will be implemented from March 31, 2023. Many contents of the "measures" are related to the implementation of listing supervision and management measures, and the continuous optimization of the regulatory environment will help to enhance the vitality of the market, and the investment value of high-quality compliance enterprises will be further clarified.

▍ overseas: liquidity expectations and Sino-US relations may continue to disturb Hong Kong stock valuations.

Judging from a series of data released in February this year, the main macro indicators show that the momentum of economic growth in the United States at the beginning of the year is still relatively strong, especially in January, employment and consumption are significantly higher than expected. Investors have further raised their expectations of a Fed rate hike since February, driven by strong macro data. Compared with the end of January, CME data show that not only will the price in Fed continue to raise interest rates 25bps in May and June this year, but the probability of raising 50bps rates in March is also close to 30%, while the probability of not cutting interest rates by the end of the year is as high as 63.2%.

In addition to the expected disturbance of overseas liquidity, frictions in Sino-US relations after the Spring Festival have been a drag on investor sentiment in Hong Kong stocks. Looking forward to March, if Sino-US relations do not ease, negative investor sentiment, especially foreign investment, is expected to continue to put pressure on Hong Kong stock valuations.

▍ recommended to focus on the consumer and real estate industry chain with sustained recovery, telecom operators with strong performance certainty, and high-quality targets with both high defense and high dividend yield.

1) consumption and real estate industry chain with sustained strong recovery: high-frequency data after the Spring Festival show that the recovery trend of pro-cyclical sectors is still very strong, and fundamental recovery is expected to remain the investment theme throughout 2023. In this context, it is suggested to pay attention to the travel industry chain in consumption, especially the hotel, catering sector, and the high-quality enterprises in the real estate industry chain.

2) Telecom operators with high prosperity in the industry and strong performance certainty: the annual report disclosure period is approaching, and the communications sector with high prosperity and strong performance certainty is worthy of attention, especially the leading operators of investment opportunities in the digital economy are expected to benefit.

3) the high-quality target of high dividend: the expected disturbance of external risk in March may still be large, and under the expectation of China's economic recovery, we expect the commodity price center to remain stable although the commodity price center is down. Finally, the energy sector with high profitability of upstream resource products and stable fundamentals is worthy of attention.

▍ risk factors:

1) the domestic economic recovery is lower than expected; 2) overseas central banks tighten money more than expected; 3) Sino-US relations have further deteriorated.

Edit / emily