China - Market Strategy 06 (Jul 24 - Dec 26)

[winston]

Chinese stocks mired in ‘secular bear market’, says top Morgan Stanley strategist

Pain is far from over as profitability faces structural declines, according to Jonathan Garner, who has a history of calling booms and busts

by Jiaxing Li

When Morgan Stanley strategist Jonathan Garner downgraded China stocks in January 2021, he said it was the time for the market to catch a breather after emerging from Covid-19 and wait for other emerging markets to catch up.

That call turned out to be close to the top of a mega market cycle.

Source: SCMP

https://www.scmp.com/business/markets/a ... 69507&tc=5

[winston]

China stocks: Can the third plenum be a game changer as investors seek fresh catalysts?

Structural issues ranging from fiscal and tax reforms to fixes for the property market are likely to be on the agenda of the four-day conference, analysts say

by Zhang Shidong

A high-stakes Communist Party gathering chaired by President Xi Jinping to be held later this month is widely expected to provide fresh impetus to China’s US$8.4 trillion stock market.

But investors may be getting ahead of themselves in pricing a valuation re-rating, and some analysts say expectations need to be managed.

More than 370 members of the Party’s Central Committee are due to gather at the plenary session from July 15 to 18 in Beijing, to chart out reform and development policies that will shape China’s economy over the next five to 10 years.

Source: SCMP

https://www.scmp.com/business/china-bus ... 07d6&tc=21

[winston]

<Research>M Stanley: US Investors In No Rush to Return to CN Mkt in ST

Morgan Stanley released a report last Friday (5th) that it had recently communicated with US investors, who paid heed to the deteriorating of the RMB exchange rate, geopolitical uncertainties and China's macro challenges, while feeling no rush to return to the Chinese capital market in the short term (3-6 months).

The broker pointed out that US investors are currently highly concentrated in the internet sector of Chinese stocks and are identifying other opportunities. Yet the overall investor sentiment is neutral/slightly negative on Chinese stocks.

Related News: CICC Expects HSI to Recover to Target Range of 19,000-20,000, Calls for Focus on 3 Major Directions

The level of interest among US investors in the performance of Chinese stocks is indeed pleasantly surprising. Interest in identifying single-stock opportunities and upcoming themes for alpha generation is also very high.

However, according to Morgan Stanley, many US investors contacted actually hold the lowest position of Chinese stocks in their history. Some hedge funds said that historically Chinese stocks accounted for 20% of their total holdings; however it has already come down to low single digits or zero at this point.

Morgan Stanley said that US investors are concerned about the potential policy direction announced at the Third Plenum of the Communist Party of China, how the mainland government will introduce stable economic policies under trade protectionism in 2H24, and when the real estate market will see the light at the end of the tunnel.

Source: AAStocks Financial News

http://www.aastocks.com/en/stocks/news/ ... -news/AAFN

[behappyalways]

China's 'National Team' Gets To Work At Key Psychological Level For Stocks
https://www.zerohedge.com/markets/china ... vel-stocks

[winston]

CHINA STRATEGY: 2H24 OUTLOOK

Going into 2H24, we expect Chinese equities to be supported by corporate earnings recovery, mainly driven by internet and platform companies, a gradual but bumpy recovery in macro data, improving real estate transactions, the upcoming high level government events (i.e. the Third Plenum and the July Politburo meeting), and the increasing focus on shareholders’ return.

Overall earnings momentum has been stabilising after 1Q24 results, especially for internet and platform companies, which accounts for around one-third of MSCI China’s index weight.

Corporate earnings started showing signs of positive earnings revision momentum since May with MSCI China expected 2024 earnings per share (EPS) having been lifted by 1.1% since May.

Our base/bull/bear case Hang Seng Index targets are 20,600/21,800/17,600. At the sector level, we maintain our preference to Communication Services, IT and selected Consumer Discretionary (mainly internet and platforms) within MSCI China Index.

We are getting less cautious on Financials amid lessened net interest margin (NIM) concerns. But we turn more cautious on Consumer Staples on the back of margin pressure.

We advocate a barbell strategy focusing on quality dividend yields and earnings growth delivery, including AI plays and market leaders.

While we prefer A-share in the medium- to long-term, we prefer offshore Chinese equities in the near-term given its sizeable exposure to internet and platform companies, which has a solid earnings momentum and large cap plays have been actively buying back shares.

Key risks would include USDCNY direction (with CNY has depreciated by 2.3% against USD in 1H24) and geopolitics tension as US presidential election is approaching.

Source: OCBC

[winston]

China’s biggest ETFs see huge inflows in latest sign of state buying amid third plenum

Rising inflows into CSI 300-linked ETFs have fanned speculation that China’s state buyers are probably trying to prop up sentiment, analysts say

by Zhang Shidong

The national team were estimated to have stock holdings worth at least 3.1 trillion yuan at the end of the first quarter, or 5 per cent of the total onshore market capitalisation.

Source: SCMP

https://www.scmp.com/business/china-bus ... 70830&tc=7

[winston]

China/HK equity strategy: Third Plenum – Reaffirming current policy framework

China’s top leaders concluded the twice-a-decade session on reform Thursday

Reform tasks in the initial communique are consistent with existing policy framework

Expect limited market impact due to little surprise

We still like internet, tech hardware and high-yield SOEs; We also provide screenings of top-rated stocks under selected reform themes

Source: DBS

https://www.dbs.com/insightsdirect/coun ... ecid=20221

[winston]

CHINA STRATEGY: THE THIRD PLENUM WAS IN-LINE WITH EXPECTATION AND REITERATES “CHINESE-STYLE MODERNISATION”

As market has relatively low expectations going into the Third Plenum, we view it as coming more or less in-line with expectations.

Overall, the Third Plenum did not have any major surprises and reiterated the current policy development framework – prioritising on supply chain self-sufficiency, technology innovation, “new quality productive forces” and the green transition. The “Chinese-style modernisation” was mentioned 22 times in the communique.

While we do not expect immediate policy measures to follow through given the nature of the Third Plenum, the unusual comments on near-term economic growth issues could be a positive surprise.

Top policymakers vowed to “unswervingly attain the full-year growth target” by accelerating the implementation of policy and proactively expanding domestic demand. We believe it could suggest that policy stances could turn more expansionary and supportive in 2H24. In the near-term, we expect the July Politburo meeting will shed more light on cyclical policy adjustments and 2H24 policy guidance.

The full version of the “Decision” and President Xi’s comments on reform plans would be a key follow-up after the Third Plenum. From a reform actions and implementation perspective, the Central Economic Work Conference in December 2024 and the National People’s Congress in March 2025 could be the key events to monitor, especially for legislation-related moves.

In light of the uneven economic recovery and increasing concerns of geopolitical tension, we maintain our preference for a barbell strategy focusing on quality dividend yields and earnings growth delivery, including AI plays and market leaders, and potential reform beneficiaries pending on more details from the Third Plenum “Decision” as highlighted in the China Strategy: 2H24 outlook.

Source: OCBC

[winston]

CHINA STRATEGY: SHIFT RESPONSE IN ANNOUNCING COUNTER-CYCLICAL EASING MEASURES

The full commentary of the Third Plenum offers no major surprise when compared to the communique. It put a heavy emphasis on promoting technology innovation and “new quality productive forces”.

Following the unusual comments on near-term economic growth issues in the Third Plenum, which we view as a positive surprise, the central bank and various ministries have made shift response well ahead of the July Politburo meeting.

More specifically,
i) the early-than-expected rate cuts; and
ii) the better-than-expected CNY300b allocation in ultra-long special treasury bond quota to fund the trade-in of consumer goods (CNY150b) and equipment upgrade (CNY148b), highlighted policymakers’ commitment to support GDP growth and echoed the call at the Third Plenum to “unswervingly attain the full-year growth target”.

We expect policy stances would turn more expansionary and supportive in 2H24. Further policy support after the July Politburo meeting is worth monitoring.

The CNY150b consumer goods subsidy, which is 90% funded by the central government, will be allocated to home appliances as well as trucks, agricultural machines, new energy vehicle (NEV) buses and auto, and will be disbursed directly from the central government to local governments.

We believe home appliances stand to benefit with a higher subsidy ratio of 15-20% of retail price with a higher cap per unit and wider product coverage when compared to the last subsidy program. We prefer Haier Smart Home (6690 HK).

For autos and NEVs, the allowance level has been lifted for qualified NEV and internal combustion engines (ICE) trade-in. The CNY15-20,000 subsidy accounts for about 10-20% of average selling price in the mass market segment and could boost auto sales in 2H24.

That said, front-loading demand could raise concern about the cannibalisation of 2025 sales. Mass market brands, such as, BYD (1211 HK) and Geely (175 HK) are likely to benefit from the boost in auto sales in 2H24.

MSCI China 2024 earnings per share (EPS) has been lifted by 0.4% month-on-month (MoM) and 1.5% since May, with communication services has the largest upward revision.

In light of the uneven economic recovery and increasing concerns of geopolitical tension, we prefer a barbell strategy focusing on quality dividend yields and earnings growth delivery, including AI plays and market leaders, and potential reform beneficiaries.

We have turned less cautious on Financials amid lessened net interest margin (NIM) concern. The latest loan prime rate (LPR) cut does not change our expectation on NIM stabilisation from a sequential basis as the negative impact of the LPR cut could be offset by the impact from the reduction of banks’ high-cost deposit. Among state-owned banks, we prefer China Construction Bank (939 HK).

Source: OCBC

[winston]

China’s mutual funds add electronics, pare consumer stocks exposure in quarterly rejig

Money managers overseeing US$4.2 trillion in Chinese stocks boosted their allocation to the electronics sector by almost three percentage points quarter on quarter

by Zhang Shidong

China’s mutual funds increased holdings of electronic stocks in the second quarter and trimmed positions in consumer names, as investment managers bought into the global artificial intelligence (AI) frenzy and China’s drive for tech self-reliance while piling into companies yielding high dividends.

Money managers in charge of 30.7 trillion yuan (US$4.2 trillion) in assets in China’s onshore mutual-fund industry boosted to 15.36 per cent the allocations to electronic names, an increase of almost three percentage points from the previous quarter, according to the data compiled by Hua An Securities based on funds’ quarterly reports.

These also added positions in telecoms, power generators and utilities over the past three months, with high-dividend plays gaining popularity among investors as bond yields tumbled.

Source: SCMP

https://www.scmp.com/business/china-bus ... 72367&tc=7