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2017 Economic Outlook & Investment Strategy Summary

Core Content Overview

This document presents the 2017 Economic Outlook & Investment Strategy by ABCI China/Hong Kong Equity Research. It outlines global and China-specific economic trends, monetary and fiscal policy expectations, and investment recommendations for the Hong Kong and Chinese stock markets.

Global Economic Outlook for 2017

Key Points:

• Inflation Pressure: Escalating cost-push inflation is expected in major industrial nations, including the U.S., Eurozone, Japan, and China.
• Monetary Policy: Central banks will adopt a more restrictive monetary stance due to rising inflation and easing deflationary pressures. USD funding costs are likely to increase, reducing liquidity in developing markets.
• Fiscal Policy: Governments will rely more on fiscal stimulus to boost global demand, although high debt levels will limit the scope of such measures.
• Liquidity Flow: Strengthening USD and rising funding costs will divert capital away from developing markets, increasing downside risks for stock markets in these regions.

Supporting Data:

• PPI Trends: Rising PPI in major nations indicates cost-push inflation.
• S&P GSCI Index: Surged ~15% year-to-date, showing increased commodity prices.
• Interest Rates: The U.S. interest rate cycle is expected to end its downtrend in 2017, with a gradual rise in rates.
• USD Strength: A stronger USD and higher funding costs will impact liquidity in developing economies.

China Economic Outlook for 2017

Key Points:

• Inflation Trends: Deflationary pressure is diminishing, and cost-push inflation is on the rise.
• PBOC Policy: The central bank may tolerate a higher inflation rate in the first half of 2017 to reduce real interest rates, thus stimulating investment and consumption.
• Interest Rate Gap: The narrowing gap between China and U.S. interest rates could increase devaluation pressure.
• Growth Model: The investment-led growth model is resuming, with more private-public partnerships (PPP) expected.
• Consumption Growth: Slow household income growth will constrain consumption, especially in the retail sector.

Supporting Data:

• CPI vs. Ex-factory PPI Gap: Narrowing gap suggests inflationary pressures.
• FAI Growth: Private sector FAI growth declined sharply in 2016, prompting increased government support through SOEs.
• Housing Market: Home purchase restrictions are expected to remain in place, leading to reduced property investment and potential price increases in 2019.
• Retail Sales: Growth in retail sales is outpaced by slower household disposable income growth.

Investment Strategy for 2017

Key Points:

• Promising Sectors: Municipal facilities services, environmental protection, green energy production, insurance, healthcare, education, tourism, entertainment, Internet, and logistics are expected to thrive.
• Investment Banks: Will benefit from increased demand for direct financing and advisory services.
• Regional Growth: Uneven provincial growth will favor niche players in high-growth regions.
• Capital Flow: Chinese capital is expected to continue flowing into the Hong Kong capital market.
• Market Targets: HSI and HSCEI are forecasted to reach 24,014 and 10,692 by the end of 2017.

Investment Recommendations:

• China Banks: Overweight – CCB (939 HK), ICBC (1398 HK)
• China Insurance: Neutral – CPIC (2601 HK), Ping An (2318 HK)
• China Securities & Brokerage: Overweight – China Merchants Sec. (6099 HK), Guangfa Sec. (1776 HK)
• China Real Estate: Overweight – Logan (3380 HK), Times Property (1233 HK)
• China E-commerce: Overweight – Tencent (700 HK)
• China Alternative Energy: Overweight – CGN Power (1816 HK), Huaneng Renewables (958 HK)
• China Environmental Protection: Overweight – Beijing Enterprises Water (371 HK), China Everbright Int'l (257 HK)
• China Healthcare Services: Overweight – Phoenix Health (1515 HK)
• China Pharma: Overweight – CSPC Pharma (1093 HK), Sinopharm-H (1099 HK)

Hong Kong Stock Market

Hang Seng Index (HSI)

• Earnings Growth: Expected to grow by 9% in 2017F.
• Trading Range: Projected to be 19,456–25,594 in 2017F.
• Valuation Metrics:
  • P/E: 9.89x–13.01x
  • P/B: 0.94x–1.23x
  • Dividend Yield: 3.22%–4.24%
• Target: End-2017F target at 24,014, which corresponds to a P/E of 12.21x and a P/B of 1.16x.
• Turnover: Expected to increase by 7% YoY to HK$71.4 billion/day in 2017F.

Hang Seng China Enterprises Index (HSCEI)

• Earnings Growth: Expected to show positive growth in clean energy, automobile, property, and infrastructure construction sectors.
• Trading Range: Projected to be 8,176–11,927 in 2017F.
• Valuation Metrics:
  • P/E: 6.75x–9.85x
  • P/B: 0.74x–1.08x
  • Dividend Yield: 2.98%–4.35%
• Target: End-2017F target at 10,692, corresponding to a P/E of 8.83x and a P/B of 0.97x.

Summary of Key Implications

Conclusion

The 2017 outlook suggests a shift from deflationary pressures to inflationary trends in both global and China markets. The global economy is expected to see a more aggressive fiscal stimulus and a tightening monetary policy, with the U.S. leading the interest rate cycle. In China, the PBOC may tolerate higher inflation to reduce real interest rates, while the private sector is expected to play a larger role in investment. The Hong Kong stock market is anticipated to benefit from increased Chinese capital inflow and the growth of sectors aligned with China's long-term development trends. Investment banks, real estate, and sectors such as healthcare and environmental protection are highlighted as key beneficiaries.