20181231-招商证券_香港_-Trump-Xi_call_provides_relief_but_PMI_data_missed_18页_2mb

China Merchants Securities (HK) Co., Ltd. - Hong Kong Equity Research: CMS Strategy Weekly (31 Dec 2018)

Core Content

Key Developments

• Trump-Xi Phone Call: Trump and Xi expressed satisfaction with trade talk progress, indicating a "very long and very good call" and that the deal would be "very comprehensive." Chinese state media emphasized the importance of a mutually beneficial agreement.
• Policy Measures:
  • The State Council vowed to treat all enterprises equally in bidding and land-use decisions, promoting competition neutrality.
  • The Ministry of Finance announced a reduction in import tariffs on 706 goods starting 1 Jan 2019, marking the third round of tariff cuts this year.
  • The National Development and Reform Commission (NDRC) and Ministry of Commerce issued a "negative" list to standardize market entry rules.
• Fiscal Policy: The National Fiscal Work Conference reiterated the government's plan to implement larger tax and fee cuts and increase special local government bonds, while emphasizing the prevention of local government debt risks.
• Rural Development: The Central Rural Work Conference called for accelerated improvements in rural infrastructure and public services.
• Local Government Bond Quota: The National People's Congress approved an earlier-than-usual quota of RMB1.39 trillion for new local government bond issuance in 2019, allowing local governments to start issuing debt in January.

US Market Performance

• The US market posted weekly gains for the first time in December, with the White House Economic Advisor Kevin Hassett confirming the safety of Fed Chairman Jerome Powell's position.
• A US trade delegation is expected to visit Beijing in early January for further talks with Chinese counterparts.

China Macro Data

• Real GDP Growth: 6.7% in June, 6.8% year-to-date (YTD).
• Industrial Profits: Dropped by 1.8% in November, the first YoY decline since 2015.
• PMI: The official manufacturing PMI fell to 49.4 in December, indicating contraction, the first since July 2016.
• Inflation: CPI was at 1.9% in June, while PPI decreased to 4.7%.
• Trade Data: Trade surplus decreased in November, and export and import growth rates were mixed.
• Labor Market: Unemployment rate remained stable at 4.8%.
• Fiscal Data: Industrial production and retail sales showed mixed trends, with some declines.
• Bond Yields: 10Y China government bond yield was at 3.48%, while 3M Shibor was at 4.16%.

US Macro Data

• Real GDP (QoQ Saar%): 4.2% in June, showing a contraction in December.
• Consumer Confidence: The Conference Board index dropped by 8.3 points to 128.1 in December, the largest one-month drop since 2015.
• Inflation: CPI at 2.9% YoY in June, while Core CPI and PCE price index showed mixed trends.
• Trade Balance: The balance of trade was negative, indicating a trade deficit.
• Labor Market: ADP nonfarm private employment and nonfarm payrolls showed mixed results, with some declines.
• Interest Rates: Fed funds rate remained at 2.00%, while 3M T-bill rate and 10Y treasury yield increased.

Stock Market Update

• HSI/CSI300: Corrected by 1.0% and 0.6% respectively over the past week, while MXCN was up by 0.3%.
• Sector Performance:
  • MSCI China: Consumer Discretionary (+4.0%) outperformed, while Real Estate (-3.7%) and Energy (-2.2%) lagged.
  • A Share: Consumer Staples (+1.4%) outperformed, while Energy (-4.3%) and Insurance (-3.4%) lagged.
• Valuations:
  • HSI and CSI300 trade at forward P/E of 10.7x and 10.7x, respectively, which are below the 5-year median.
  • MSCI China and CSI300 are also trading at lower valuations compared to historical levels.

Our View

• 2019 Outlook: The firm reiterates its view on the 2019 outlook, suggesting a market rebound in NT due to favorable policies.
• Uncertainty: 1Q19 earnings season and US market volatility may bring uncertainty.
• Key Risks:
  • Pullback of the US market.
  • Re-escalation of US-China trade tensions if no deal is reached before early March.
  • Tighter-than-expected policy measures.
  • Higher-than-expected USD strengthening.
• Key Catalysts:
  • Introduction of more easing policies in China.
  • A bilateral solution between the US and China.
  • Weakening of the USD.

Key Publications and Investment Ratings

• The report includes a list of key publications and investment ratings.
• It also provides a list of key tables and charts for further analysis.

Disclaimer

• The report includes a disclaimer regarding the information provided and the use of data from Bloomberg and CMS (HK).

Summary

• Trade Talks: Positive sentiment from Trump and Xi, with both expressing satisfaction with the progress.
• Policy Changes: China introduced measures to promote fair competition and reduce tariffs, while also focusing on fiscal and rural development.
• Macro Trends: Both China and the US showed mixed macroeconomic data, with China's economy showing signs of slowing.
• Market Performance: Global equity indices showed varied performance, with the US market posting gains.
• Valuations: Chinese and Hong Kong indices trade at lower valuations than historical averages.
• Sector Analysis: Consumer Discretionary and Consumer Staples outperformed in MSCI China and A Shares, while Real Estate and Energy lagged.
• Risks and Catalysts: The report highlights key risks and potential catalysts that could influence the market in 2019.

Key Points

• Trade Talks: Trump and Xi expressed satisfaction with the progress, but the deal is not yet finalized.
• Policy Measures: China introduced several measures to support the economy, including tariff cuts and promoting fair competition.
• Economic Indicators: China's macro data shows signs of slowing, while US data is mixed.
• Market Valuations: Chinese and Hong Kong indices are undervalued relative to historical levels.
• Sector Performance: Consumer sectors outperformed, while energy and real estate lagged.
• Uncertainty: 2019 outlook remains uncertain due to potential policy changes and trade tensions.

Conclusion

The report provides a comprehensive analysis of the macroeconomic and market conditions in China and the US, highlighting the positive sentiment from trade talks and the introduction of supportive policies. Despite the progress, the firm notes the potential for market uncertainty due to upcoming earnings season and possible trade tensions. The market remains undervalued, with consumer sectors showing strength, while energy and real estate lagged. The firm remains optimistic about a market rebound in 2019, contingent on favorable policy developments and a resolution to trade tensions.