20150323-申万宏源研究_香港_-Hong_Kong_equities_strategy_27页_1mb

Summary of Document Content

Core Content

This document is a financial analysis report by Anthony Hu, CFA, from SWS Research, focusing on the impact of global liquidity improvements, particularly due to the European Central Bank's quantitative easing (QE) programme, on the Hong Kong equities market and related sectors. It also discusses the broader economic context of China and the potential effects of its fiscal and monetary policies on market performance.

Main Views and Key Information

Global Liquidity and QE Impact

• Global Liquidity Improvement: The ECB's QE programme, which began in March 2015 and is expected to last until September 2016, is projected to improve global liquidity over the next 18 months.
• Hot Money Trends: Empirical analysis shows that hot money flows prefer markets with higher certainty.
• Performance of Developed vs Emerging Markets: Developed markets, especially the US, Japan, and core European markets, have historically outperformed emerging markets during QE cycles.
• Hong Kong's Performance: Hong Kong's market performance is closely tied to China's economic conditions. It has experienced fund inflows when China's GDP accelerated and outflows when it decelerated.

China's Economic Environment

• Economic Slowdown: China's economy has slowed, with GDP growth expected to be 7.0% in 2015, the lowest in 25 years.
• Deflation Risks: There is a rising risk of deflation, with CPI and PPI both showing downward trends.
• Monetary Policy: China has been implementing monetary easing measures to counteract deflationary pressures.
• Local Government Debt Substitution: The Chinese government announced an Rmb1tn debt substitution program to replace high-cost bonds with low-cost ones, aiming to reduce the risk-free rate and boost bank lending and economic recovery.

Investment Recommendations

• Overweight Financials: The financials sector is recommended due to potential valuation re-rating from the debt substitution and strong momentum in the A-share market.
• Overweight Steel and Construction: These sectors are expected to benefit from improving supply-demand dynamics and strong infrastructure investment.
• Underweight Oil & Gas and Telecommunications: These sectors are not recommended due to weak economic fundamentals and limited growth prospects.

Economic Forecast and Earnings Outlook

• HSCEI Earnings Forecast: The 2015 earnings growth forecast for the Hang Seng China Enterprises Index (HSCEI) was revised down from 9.6% to 5.5% YoY.
• HSCEI Target: The year-end target for HSCEI was revised from 15,000 to 13,000, representing an 8x 2015 P/E and a 7% upside potential.

Impact of Greek Debt Crisis

• Risk Aversion: The Greek debt crisis has led to increased risk aversion among investors, negatively impacting emerging markets including Hong Kong.
• Tail Risk: The tail risk of a Grexit is expected to make investors more cautious, affecting market performance in the near term.
• Key Dates for Greek Debt Negotiations: Several key events in the following months could influence investor sentiment and market performance.

Historical Performance During QE Cycles

• US QE1 (2008-2010): Hong Kong outperformed other markets during this period due to China's rapid economic recovery and the Rmb4tn stimulus package.
• US QE2 (2010-2011): Hong Kong underperformed as China's economic growth slowed and inflationary pressures rose.
• US QE3 and Japan QQE (2012-present): Hong Kong's performance was weak compared to other developed markets, with a focus on economic improvement and deflation concerns.

Fiscal and Monetary Policy

• Fiscal Deficit Increase: China's fiscal deficit is expected to rise to Rmb1.62tn, or 2.3% of GDP in 2015, reflecting a shift towards proactive fiscal policy.
• Infrastructure Investment: The government is focusing on infrastructure projects, including railway investment, the "One Belt, One Road" initiative, and integration in the Beijing-Tianjin-Hebei economic zone.
• Potential Crowding Out of Private Investment: The increased government spending may reduce private sector investment and could have a negative impact on the economy.

Market Valuation and Performance

• Valuation Premium: Market valuations are assessed relative to the US, with a score from 1 to 5 (5 being the most attractive).
• Hong Kong Valuation: Hong Kong is currently trading at a cheap valuation compared to the US, but the market needs more solid signals of economic recovery to attract investors.
• Thai Market Example: Thailand's experience shows that monetary easing alone is not sufficient; economic improvement is essential for market recovery.

Conclusion

The Hong Kong market is expected to remain weak in the short term due to the slowing Chinese economy and deflationary pressures. However, the local government debt substitution programme may offer some relief. Investors are advised to overweight financials, steel, and construction sectors while underweighting oil & gas and telecommunications. The outcome of the Greek debt crisis and the effectiveness of China's economic stimulus measures will be critical in determining the future performance of the Hong Kong market.