20220704-招银国际-China___HK_Market_Weekly_Outperforming_due_to_different_cycles_9页_1mb

China / HK Market Weekly Summary

Core Content

This report provides an overview of the recent performance and outlook for China and Hong Kong stock markets, highlighting the divergence in economic and monetary cycles between China / HK and the US. It discusses market trends, fund flows, interest rates, sentiment indicators, valuations, and earnings data, offering insights into the current market dynamics and investment recommendations.

Market Performance

• Last Week (27 Jun – 1 Jul):

  • China / HK stock markets gained, outperforming the rest of the world.
  • The Hang Seng Index (HSI) and CSI 300 Index rose by 0.7% and 1.6%, respectively.
  • A-shares have been rising for five consecutive weeks, while US stocks have seen four consecutive declines.
  • In HK, Consumer & Property sectors led the gains, while IT & Healthcare pulled back.
  • In A-shares, Real Estate, Energy & Consumer sectors outperformed.

• Market Outlook:

  • The report anticipates that China / HK markets will continue to outperform the US due to differing economic and monetary cycles.
  • The US economy is slowing down with aggressive monetary tightening, whereas China is recovering with slight monetary easing.
  • Growth stocks such as Internet, Healthcare, and Consumer Discretionary are preferred as they are expected to benefit from economic recovery and easing regulatory concerns.

Fund Flows

• China Internet ETF (KWEB):
  • Recorded strong inflows over the past few weeks.
• Stock Connect Flows:
  • Southbound net inflows increased week-over-week (WoW), despite only four trading days due to a holiday.
  • Northbound inflows rebounded moderately last week.
  • Southbound inflows have moderated compared to Q1, while Northbound inflows have been increasing.
  • The AH premium narrowed by 1.0 ppt last week.

Interest Rates

• Fed Rate Hike Fears:
  • Have cooled somewhat after the release of weaker-than-expected US economic data, including the ISM manufacturing index and core PCE price index.
• Implied Fed Funds Rate:
  • Peaked at 3.72% on 14 Jun and has since retreated to 3.32%.
• Yield Curve & Spread:
  • The US 10-year yield has retreated, causing the US-China 10-year yield spread to narrow.
  • The US yield curve has flattened.

Sentiment Analysis

• Risk Appetite:
  • Remained largely unchanged in HK, with the Fear Index (VHSI) retreating to below 30, indicating improved sentiment.
  • The short-sell ratio on HK mainboard dropped to 16%, suggesting reduced selling pressure.
• Sector Sentiment:
  • Short-sell ratio decreased in IT, Healthcare, Consumer Discretionary, Utilities, and Materials.
  • Short-sell ratio increased in Property, indicating higher short interest in this sector.

Valuation Trends

• Valuation Gaps:
  • Valuation gaps between HK and other major markets have narrowed due to recent outperformance.
  • The HSI forward P/E is approaching the 10-year mean, while the US / Europe / Japan P/E have dropped to around the 10-year mean after recent weakness.
• Sector Valuations:
  • Many sectors of the HKSCI Index are near their troughs, suggesting potential for re-rating.

Earnings & EPS Estimates

• Earnings Consensus:
  • The FY22E EPS consensus for HSI, HSTECH, and CSI 300 has remained largely unchanged in the past two weeks.
  • Earnings estimates are expected to remain relatively stable before the 2Q earning season begins in late-Jul.

Investment Recommendations

• Preferred Sectors:
  • Growth stocks such as Internet, Healthcare, and Consumer Discretionary are favored due to their potential for re-rating in the context of economic recovery and easing regulatory concerns.
• Ratings:
  • CMBIGM provides ratings such as BUY, HOLD, SELL, OUTPERFORM, MARKET-PERFORM, UNDERPERFORM, based on potential returns and sector performance relative to benchmarks.

Disclosures & Legal Information

• Analyst Certification:
  • The research analyst certifies that the views expressed reflect personal opinions and that there is no direct or indirect compensation tied to the views in the report.
  • The analyst has not traded in the stocks covered within 30 days prior to the report's release, and will not trade them within 3 business days after.
• Conflicts of Interest:
  • CMBIGM may have investment banking relationships with the issuers covered in the report.
  • The report may be used for informational purposes only and is not an offer to buy or sell securities.
• Distribution Restrictions:
  • The report is intended solely for major US institutional investors, Accredited Investors, Expert Investors, and Institutional Investors in Singapore.
  • Recipients are advised not to distribute the report to others without prior written consent.

Summary

The China / HK markets have shown resilience and outperformance against global peers, driven by a recovery in China's manufacturing PMI and a more accommodative monetary policy. Growth sectors like Internet, Healthcare, and Consumer Discretionary are seen as favorable for re-rating. Fund flows through the Stock Connect have remained positive, with Southbound inflows increasing and Northbound flows rebounding. Valuation gaps have narrowed, with HK stocks approaching their 10-year P/E mean, while US stocks have seen a drop. Earnings estimates for key indices remain stable, and the overall sentiment in HK has improved, with reduced short-sell activity in several sectors. The report highlights the potential for continued outperformance in China / HK markets due to differing economic and monetary cycles.