by winston » Mon Sep 26, 2022 11:21 am
China Strategy - What to focus on the upcoming 20th Party Congress?
The 20th Party Congress, which is the most important political event of the decade in China, is scheduled to be held on 16 October 2022.
The Party Congress will elect the new Politburo and its Standing Committee, i.e. top leadership, for the next five years.
Given that top government positions are usually held by members of the Politburo and its Standing Committee, we believe the Party Congress is set to launch a new political business cycle.
While a drastic shift in policy immediately after the Party Congress is not expected, better policy implementation and coordination, and more clarity on policy direction are anticipated after the reshuffling of top leadership and local officials is completed.
Despite the relatively limited data points, performance of Chinese equities has been supportive after the Party Congress over the past two decades.
Looking ahead, growth recovery and equities market performance will hinge on two major developments –
i) whether there will be any potential fine-tuning in the dynamic zero Covid-19 strategy and
ii) whether there will be more easing and holistic approach in managing the slowdown in real estate sector.
Market has low expectations for a significant turnaround in the dynamic zero Covid-19 strategy immediately after the Party Congress and is expecting a potential change around March next year given many key events will be held in the next few months and a relatively low vaccination rates for the high-risk group.
Should there be faster-than-expected and/or more meaningful adjustment to the dynamic zero Covid-19 strategy, it could be a positive catalyst.
The timing and magnitude of potential fine-tunning (or the exit roadmap) of the dynamic zero Covid-19 strategy should be something to watch out for.
We view the onshore A-share equities should be better positioned in light of the Party Congress given it is more sensitive to improving onshore liquidity and an expected better policy implementation and coordination.
It is also less correlated to external equities markets, and therefore the associated external risks such as the aggressive policy tightening by major central banks in developed markets and rising US-China tension.
In light of the expectation that the long-term strategic focus will remain intact, we continue to prefer sectors and industries that align with policy directions, e.g. selective infrastructure and construction related industries (including renewables but cautious on building materials) and autos, new energy vehicles (NEV) and their supply chains (such as battery and lithium).
We remain selective on the consumer sector and the re-opening plays. We prefer the telecom sector as an alternate quality defensive dividend play. Chinese banks and real estate are expected to underperform the broad market. Furthermore, recent developments between the US and China could potentially increase tail risk for Chinese banks.
While there is a low expectation of a major turnaround of the dynamic zero Covid-19 strategy right after the 20th Party Congress, the re-opening momentum has gathered pace for Hong Kong (HK). Hong Kong Special Administrative Region (HKSAR) government has just announced further relaxing the hotel quarantine arrangements for HK inbound travellers. Hence, selected HK travel and retail plays could potentially benefit from the expectation of further re-opening in HK.
Source: OCBC
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