20211006-招银国际-China_s_stagflation_fears_overblown_12页_1mb

Summary of Strategy Report

Core Content

This report analyzes the current economic and market conditions in China and the Hong Kong stock market, focusing on the impact of the power outage, stagflation fears, and upcoming policy developments. It also provides sector-specific recommendations and highlights key external factors such as the US debt ceiling and job report.

Main Views

• Economic Slowdown and Power Outage: China's economy is facing multiple challenges, including a slowdown in GDP growth, regulatory tightening, and the impact of a power outage affecting 20 provinces. However, stagflation is considered unlikely due to subdued CPI and relatively stable GDP growth.

• Stagflation Fears Overblown: Although commodity prices are rising and inflationary pressures are present, the main driver of price increases is PPI, not CPI. The Fed and other central banks are considering exit strategies, but China's monetary policy remains stable, offering support to the market.

• Policy Watch: The Politburo meeting at the end of October is expected to release pro-growth signals, especially in response to the current economic pressures. The 6th Plenary Session of the CPC Central Committee in November will focus on reviewing major achievements, including progress in "three tough battles" which may influence relevant sectors.

• HK Stock Market Outlook: The Hang Seng Index (HSI) is near its crisis low in terms of valuation, with P/B at 1.01x and P/E below 10x. The index has fallen to its long-term uptrend support levels, indicating potential for a rebound. A bullish divergence between HSI and RSI suggests a bottoming pattern.

• Sector Preferences:

  • Preferred Sectors: Consumer, New Energy, New Energy Vehicles (NEV), Property & Financials.
    • Consumer Sector: Less vulnerable to regulatory and power issues; may benefit from the "common prosperity" policy.
    • New Energy Sector: Supported by the "carbon neutral" policy and the power outage; selective wind power stocks like Suntien (956 HK) and Datang Renewable (1798 HK) are recommended.
    • NEV Sector: Expected to benefit from easing chips shortages and strong production/sales in Q4; BYD (1211 HK) is highlighted.
    • Property & Financials: Performance depends on Evergrande's resolution. Housing policy loosening could act as a re-rating catalyst. Quality developers like CR Land (1109 HK) are preferred. Banks and insurers may rally once property risks are alleviated.
  • Avoid Sectors: Upstream materials, IPPs, and downstream manufacturing, which are highly sensitive to power outages and may face production disruption and higher costs.

Key Information

• GDP Growth: Expected to be ~5.5% in 2022, slightly lower than pre-pandemic levels but not enough to trigger stagflation.
• CPI and PPI: CPI remains subdued (0.8% YoY in August), while PPI is rising due to higher commodity prices.
• HSI Valuation: P/B is at 1.01x, near historical lows, and P/E is below 10x, indicating potential value opportunities.
• Technical Analysis: HSI has fallen to its long-term uptrend support (around 23,000-24,000), and a bullish divergence with RSI suggests a potential reversal.
• Policy Implications: The Politburo meeting and the 6th Plenary Session could provide positive policy signals, especially for the property and financial sectors.
• External Factors:
  • US Debt Ceiling: The US government may face cash shortages by October 18, but historical precedent suggests a last-minute deal is likely to avoid default. The 2011 crisis had a significant market impact, but this time, investors are more confident.
  • US Job Report: The non-farm payrolls report on October 8 is critical, but even if it underperforms, it is unlikely to derail the Fed's tapering plans.

Conclusion

While the power outage is adding pressure to the Chinese economy, stagflation risks are considered low due to the stability of monetary policy and the resilience of CPI. The upcoming Politburo meeting and the 6th Plenary Session may provide positive policy signals. The HK stock market is undervalued, with technical support and bullish divergence suggesting a potential rebound. Investors are advised to focus on policy-driven sectors like consumer, new energy, and NEV, while avoiding those sensitive to the power outage. External factors like the US debt ceiling and job report should also be monitored closely.