Zhitong Finance APP learned that CICC issued a strategy report stating that this round of consolidation is a short break in the rising market since November last year rather than a complete reversal of the upward trend. The gap between the dynamic valuation of the MSCI China Index and the reasonable level supported by current economic growth has rapidly narrowed from more than 20% (11.6 times) to the current level of about 1% (10.3 times). As relatively reasonable or even low-level valuations may provide downside protection for the market and corporate earnings continue to recover as a whole, the team will also look forward to potential catalysts such as more favorable domestic policies to reverse the current market trend. It is recommended that investors can gradually increase their allocation or wait for the uncertainty to subside.
Considering external uncertainties and the lack of new domestic policies, CICC believes that the market still does not rule out continuing to consolidate, but at the same time it is approaching the “comfort zone” and gradually waiting for the arrival of new catalysts. The market rally is not over yet, and the baseline scenario is more similar to 2019, that is, driven by modest earnings growth (6%-10%), the market gradually turns to structural opportunities after a quick fix. In terms of allocation strategy, in addition to consumption and real estate that benefit from favorable policies, investors are advised to pay attention to three directions: the Internet and healthcare, which are expected to reverse and repair, and high-tech software and hardware.
Market Trend Review
Affected by factors such as the possibility that the Fed’s interest rate hike will last longer and the end point will be higher, as well as rising geopolitical uncertainties, market sentiment was further suppressed last week, and the overseas Chinese stock market fell sharply again. The growth sector lagged behind, with the Hang Seng Technology Index falling 5.8%, while the Hang Seng China Enterprises Index, MSCI China Index and Hang Seng Index fell 4.1%, 3.9% and 3.4% respectively. In terms of sectors, consumer discretionary and media and entertainment sectors lagged behind, falling 7.0% and 6.8% respectively, while energy and materials sectors were the top gainers, rising 1.7% and 1.1% respectively.
Chart: MSCI China fell 3.9% last week, led by consumer discretionary sector
Source: FactSet, CICC Research
Market Outlook
The overseas Chinese stock market fell further, closing down for three consecutive weeks. As the Hong Kong stock market is particularly sensitive to fluctuations in the external environment, factors such as rising expectations of Fed policy tightening and geopolitical tensions combined to bring the market under pressure again last week. In the context of strong retail sales data in the United States in January, higher-than-expected PPI inflation data made the market worry that the Fed will continue its policy tightening pace. Affected by this, the 10-year U.S. bond rate and the U.S. dollar exchange rate both rose sharply last week.
The recent downward trend in the overseas Chinese stock market has lasted for four weeks. This weak trend highlights the recent ambivalence of investors, mainly due to the impact of the unfavorable external environment. The 10-year U.S. bond rate and the U.S. dollar exchange rate rose sharply and triggered volatility in the global market. In addition, renewed geopolitical uncertainty has also suppressed investor risk appetite. Looking back, at the beginning of this year, the Hang Seng Index has corrected nearly 12% since the high point at the end of January, and the growth sector accounted for more The relatively high Hang Seng Technology Index fell by more than 16.5% within a month. We reminded investors last week that they can still maintain some patience, mainly considering that although the previous expectation of rushing ahead has been digested, more catalysts are still needed to reverse the market decline (“Callback Provides Layout Opportunity”).
Chart: The overall valuation of the market has fallen, and the valuation of the old economic sector is still low
Source: FactSet, CICC Research
As the market continues to consolidate, more worries emerge. As we pointed out last week, we tend to view this consolidation as a brief break in the rally from last November rather than a complete reversal of the uptrend. If investors did not grasp the previous round of rapid rebound in time, they can take this callback as an opportunity to re-arrange. Moreover, from a horizontal perspective, the attractiveness of the market is also gradually emerging. Our model shows that after the recent correction, the gap between the dynamic valuation of the MSCI China Index and the reasonable level supported by the current economic growth has narrowed rapidly from more than 20% (11.6 times) to the current level of about 1% ( 10.3 times). The dynamic valuation of the Hang Seng Index has also dropped from 10.6 times close to the long-term average to about 9.5 times, which is below one standard deviation below the 10-year average. As relatively reasonable or even low valuations may provide downside protection for the market and overall corporate earnings continue to recover, as the two sessions are approaching, we will also look forward to potential catalysts such as more favorable policies in the country to reverse the current situation. market trends. Of course, fluctuations in the external environment may still not rule out downward pressure. We suggest that investors can gradually increase their allocation or wait for the uncertainty to subside.
Chart: MSCI China Index valuation is only about 0.7% higher than what we estimate is justified by current economic growth conditions
Source: Bloomberg, CICC Research
Externally, the Fed’s rate hike path may bring short-term challenges to the market, but it will not reverse the upward trend of the market as a whole. After the U.S. PCE and PMI data released last week were higher than expected, the 10-year U.S. bond interest rate rose sharply to exceed 3.95%, and the U.S. dollar index also exceeded 105, triggering risk aversion among investors in global markets. In this environment, the tug-of-war between the Fed’s policy tightening pace and inflation may continue for a longer period of time, and it will still become the main source of volatility in the Hong Kong stock market in the short term. The CME’s Fed Watch tool shows that investors are reassessing expectations for the pace of Fed policy tightening, and the market expects the Fed to continue raising interest rates by 25 basis points in the next three FOMC meetings, and eventually raise the benchmark interest rate to the range of 5.25%-5.5%. At the same time, the minutes of the FOMC’s February meeting still showed that Fed officials are determined to bring inflation down to their 2% target and that it will take some time to achieve this goal. Finally, we also recommend that investors pay close attention to the recent uncertainties in Sino-US relations (such as more restrictive new regulations) and the latest developments in European geopolitical conflicts.
Chart: The 10-year U.S. bond rate rose sharply, breaking through 3.95%
Source: Bloomberg, CICC Research
Although external pressure is difficult to quickly eliminate, domestic economic growth, especially the potential growth stabilization policy during the two sessions, is expected to become the main driving factor affecting market trends. A core assumption that supports our continued bullishness on the market is that since the end of 2022, policies to stabilize growth, such as positive measures for the real estate market, may continue to be brewed and exerted force. As the two sessions are about to be held, the market is also looking forward to the introduction of further favorable policies, especially at the level of stimulating demand. We believe that it is very important to pay attention to the policy stance of the real estate industry. The policy stance surrounding the real estate industry at the two sessions may become a crucial decisive factor affecting China’s overall economic growth this year. In addition, in the monetary policy implementation report for the fourth quarter of 2022, the People’s Bank of China stated that it will focus on supporting the expansion of domestic demand, and that a sound monetary policy must be precise and powerful to provide stronger support for the real economy. Finally, it is worth mentioning that recent earnings announcements by Chinese tech giants such as Alibaba have been higher than expected, which also points to upward momentum in domestic economic growth. With the arrival of the peak period of performance release, we also remind investors to pay attention to the investment opportunities that may be brought about by the performance of related targets.
Looking forward, considering external uncertainties and the lack of more new domestic policies, we believe that the market still does not rule out continuing to consolidate, but at the same time it is also approaching the “comfort zone” and gradually waiting for the arrival of new catalysts, including more Positive factors such as signs of domestic economic growth recovery, continuous introduction of policies to stabilize growth, and improvement in U.S. inflation. After the completion of the risk premium repair (the first step, completed in November last year) and the near completion of the valuation repair (the second step, currently in progress), we judge that earnings expectations will play a more important role in the next rebound path and upside of the market for an important influence. On the whole, we believe that the market upswing is not over yet, and the baseline scenario is more similar to 2019, that is, driven by modest profit growth (6%-10%), the market gradually turns to structural opportunities after a quick repair.
In terms of allocation strategy, in addition to consumption and real estate that benefit from favorable policies, we recommend that investors pay attention to three directions: the Internet and healthcare, which are expected to reverse and repair, and high-tech software and hardware.
Specifically, the main logic supporting our view and the factors that need to be paid attention to last week mainly include:
1) The central bank announced the implementation report of China’s monetary policy for the fourth quarter of 2022, proposing that a sound monetary policy should be precise and powerful. According to the report, looking forward to 2023, my country’s economic operation is expected to recover in general.The report emphasizes that a prudent monetary policy must be precise and powerful, and that inter-cyclical adjustments must be made. It should not only focus on supporting the expansion of domestic demand and provide stronger support for the real economy, but also take into account the short-term and long-term, economic growth and price stability, and internal and external balance. Do not engage in “flood irrigation” and stabilize sustainable support for the real economy[1]。
2) The Federal Reserve released the minutes of the February FOMC meeting, stating that it will continue to fight inflation. The minutes mentioned that participants expected the continued increase in the target range for the federal funds rate to be consistent with the Committee’s long-term goals. The upside risk of inflation is still the core reason for the implementation of restrictive monetary policy, and it is necessary to see evidence that inflation actually falls by 2%.In the current inflation data, the price of core services other than housing has fallen slowly, and the tight labor market may also bring upward pressure on inflation.[2]。
3) The US PMI and PCE data both exceeded expectations. The U.S. Markit PMI was revised up slightly to 47.8 in February from 46.9 in January, suggesting a recent easing of the manufacturing downturn. The U.S. Markit services PMI in February was raised to 50.5 (from 46.8 in January), the highest level in eight months, both of which exceeded market consensus expectations. Affected by sufficient inventory and high inflation, U.S. customer demand is weak, and new orders have decreased significantly year-on-year. However, U.S. business activities have recently recovered moderately, and the recession is likely to be delayed, but the trend has not been completely reversed. In addition, the core PCE price index in the United States in January rose more than expected year-on-year, recording 4.7%. Personal consumption expenditures in the United States rose by 1.8% month-on-month in January, recording the largest increase in the past two years, exceeding the consensus forecast of 4.3%.
4) The Financial Secretary of the Hong Kong Special Administrative Region Government released the 2023-2024 Budget.Financial Secretary Chen Maobo stated that 1) the Legislative Council has decided in January to exempt stamp duty on specific transactions of market makers in the dual-counter securities market, and will introduce the relevant market maker mechanism in the first half of the year to improve the circulation and price efficiency of RMB-denominated stocks, in line with the local The issuer sets up a RMB trading counter to promote the issuance and trading of RMB securities in Hong Kong; 2) The Hong Kong Stock Exchange plans to implement the listing system for advanced technology companies in the first quarter of this year, broaden the listing channels for issuers, and also plans to propose specific proposals for GEM in 2023. Reform proposals; 3) The Hong Kong Stock Exchange will discuss with the Hong Kong Securities Regulatory Commission to further optimize the listing rules, including the relevant arrangements after the issuer repurchases shares[3]。
6) Liquidity: The inflow momentum of southbound funds and overseas active funds remains unchanged. Data from EPFR shows that a total of US$120 million of funds from overseas active funds flowed into the overseas Chinese stock market (including Hong Kong stocks and Chinese concept stocks) last week, and the inflow momentum has been maintained for seven weeks. Meanwhile, mainland Chinese investors also bought more than HK$4.5 billion of Hong Kong stocks through Hong Kong Stock Connect last week.
Chart: Overseas active funds returned to the Hong Kong market for the seventh consecutive week
Source: Wind, EPFR, CICC Research
Investment Advice
On the whole, we believe that the market continues to rise amidst twists and turns, and changes in domestic economic growth policies and the Fed’s policy path deserve attention. In terms of allocation strategy, we recommend that investors pay more attention to high-quality growth (low PEG), such as consumption and real estate under policy optimization, Internet and healthcare that are expected to reverse and repair, and high-tech manufacturing with high prosperity. We recommend overweighting some information technology (software and semiconductors), media entertainment, optional consumption and services, and some healthcare and real estate; maintaining a cautious view on raw materials, industries, transportation, and utilities.