20210303-招银国际-March_Monthly_Strategy__Don_t_panic_over_rising_bond_yield_11页_1mb

CMB International Securities | March Monthly Strategy Summary

Core Content

This document provides a market strategy report from CMB International Securities for March, focusing on the implications of rising U.S. Treasury yields on global and Hong Kong stock markets, and offering sector recommendations for investors.

Main Points

• Rising bond yields are not a cause for panic: The increase in U.S. Treasury yields is attributed to improved economic growth and reduced deflation risks, not an imminent threat to stock markets.
• Bond yields remain low: Despite recent increases, U.S. 10-year Treasury yield is still near its pre-pandemic low, and real yields are negative in major developed countries.
• Fed's "average inflation targeting" policy: The Federal Reserve has shifted its approach to allow inflation to rise above 2% for some time, which reduces the likelihood of immediate rate hikes.
• Stocks and bonds are positively correlated: Historical data shows that stock prices tend to rise alongside bond yields, though short-term divergence can occur.
• Cyclicals are preferred over growth stocks: The strategy recommends shifting to cyclicals due to their better performance in a rising yield environment and favorable valuations.

Key Information

Bond Yield Trends

• The recent rise in U.S. Treasury yields is a result of vaccination-driven economic recovery and higher inflation expectations.
• U.S. 10-year Treasury yield increased from 0.92% to 1.43% since the end of 2020, but remains at a low level.
• Real yields (inflation-adjusted) are still negative in major developed countries, supporting equity markets.
• The Fed's new policy of "average inflation targeting" suggests no immediate rate hikes, reducing the risk of a "taper tantrum" similar to 2013.

Sector Allocation

• Cyclicals are expected to outperform: Financials, energy, and materials are favored over growth sectors such as IT, consumer, and healthcare.
• Reasons for cyclicals' outperformance:
  • Vaccinations improve global economic outlook and earnings for cyclicals.
  • Higher yields and inflation expectations benefit cyclicals.
  • Cyclicals are undervalued relative to growth stocks.
  • Southbound inflows to HK stocks have declined, putting pressure on growth stocks.

Market Outlook

• The Hang Seng Index (HSI) is expected to remain volatile but range-bound between 28,000 and 31,000.
• The HSI has experienced a 14% rise from early January to mid-February, driven by Southbound inflows.
• Growth stocks such as Tencent and Meituan have been heavily favored by Mainland investors, but this trend may reverse as Southbound inflows decline.

Preferred Sectors and Stocks

Sector	Company	Ticker	Rating	Target Price
Insurance	China Life	2628 HK	BUY	HK$28.14
Property	CR Land	1109 HK	BUY	HK$44.79
Property	Shimao	813 HK	BUY	HK$44.94
Property	KWG	1813 HK	BUY	HK$17.87
Capital Goods	Zoomlion	1157 HK / 000157 CH	BUY	HK$16 / RMB17.8
Capital Goods	Jiangsu Hengli	601100 CH	BUY	RMB143
Capital Goods	Weichai Power	2338 HK / 000338 CH	BUY	Under review

Risks

• Emerging Markets (EM) currency and fund flows: Rising U.S. Treasury yields may lead to EM currency depreciation and fund outflows, affecting returns on EM equities.
• Historical context: During the 2013 "taper tantrum", EM currencies sharply declined as U.S. yields rose. Similar risks may re-emerge if yields continue to rise.

Conclusion

The report concludes that while rising bond yields may cause short-term volatility, they are not a significant threat to equity markets due to low nominal yields, negative real yields, and the Fed's accommodative stance. Investors are advised to favor cyclicals over growth stocks in the short term, as these sectors are more resilient and undervalued. Growth stocks may underperform until the market finds a better entry point. The Hang Seng Index is expected to remain range-bound, with potential fluctuations due to economic data and fund flows.

Analyst Information

• Analyst: Daniel So, CFA
• Contact: (852) 3900 0857 | danielso@cmbi.com.hk

Market Data

• Hang Seng Index: 29,096
• 52-week High / Low: 31,183 / 21,139
• 3-month avg. daily turnover: HK$204.8bn

Indices Performance

Period	HSI	HSCEI
1-month	-0.5%	-2.1%
3-month	9.7%	7.4%
6-month	15.8%	13.6%