20210601-招银国际-Short-term_Value__Medium-term_Growth_11页_1mb

June Monthly Strategy Summary

Core Content

This document outlines a short-term value and medium-term growth strategy for Chinese equities, based on current market conditions and economic indicators. It highlights the performance of value stocks in the short term and the potential resurgence of growth stocks in the medium term. The analysis includes insights on global and local market trends, sector performance, currency movements, inflation expectations, and investment recommendations.

Main Views

• Short-term (1-2 months): Value stocks are expected to moderately outperform growth stocks.
• Medium-term (2H21): Growth stocks are anticipated to regain momentum and outperform value stocks.
• Sector Allocation: A more balanced approach to sector allocation is recommended over frequent bets on sector rotation.
• CNY Appreciation: The strong appreciation of the Chinese yuan (CNY) is seen as a positive for Chinese stocks listed in Hong Kong, especially value stocks and financials.
• PPI Trends: PPI (Producer Price Index) is expected to peak in the second half of 2021, which may lead to underperformance in energy and materials sectors.
• Valuation Opportunities: Growth stocks, despite recent earnings cuts, are now more attractively valued, especially in sectors like internet and consumer staples.

Key Information

1. Market Performance in May 2021

• Global stock markets remained in an uptrend despite inflation concerns.
• HSI (Hang Seng Index) gained 1.5% in May, while HSCEI (Hang Seng China Enterprises Index) only rose 0.6%.
• HSTECH (Hang Seng TECH Index) declined by -2.5% in May.
• MSCI World and S&P 500 also showed positive returns.

2. Sector Divergence Narrowing

• Value stocks outperformed growth stocks in May, but sector divergence has been narrowing.
• Pre-pandemic, the correlation between value and growth stocks was high (0.65-0.80), but dropped to 0.4 during the pandemic.
• Recent trends suggest a return to pre-pandemic levels, indicating that dramatic sector rotations may become less frequent in the long term.

3. CNY Appreciation and HSCEI Performance

• CNY appreciated 2.9% against the USD over the past two months, reaching a 3-year high.
• HSCEI did not follow the CNY's strength in the past 2-3 months, but may catch up in the near future.
• Sectors most benefitting from a strong CNY are financials and asset-heavy industries.

4. PPI Peaking and Commodity Stocks

• China's PPI surged to 6.8% YoY in April, but is expected to slow in the second half of 2021.
• Energy and materials stocks are highly correlated with PPI and may underperform as PPI growth decelerates.
• Real Estate is the only sector with a negative correlation to PPI, suggesting it may outperform in the second half of 2021.

5. Earnings and Valuation Trends

• During the Q1 result season, communications and consumer sectors faced earnings cuts, while healthcare and materials saw upward revisions.
• After significant share price pullbacks, growth stocks are now trading at forward P/E levels below historical averages, making them more attractive.

6. Short-term Outlook

• Value stocks are expected to maintain their lead in the next 1-2 months.
• Drivers: Strong CNY, low-base effect for value stocks, and strong relative momentum.
• Preferred Sectors: Financials (banking, insurance, brokerage).

7. Medium-term Strategy

• Growth stocks are expected to regain momentum in the second half of 2021.
• Factors Supporting Growth:
  • CNY appreciation may not be sustainable.
  • Earnings and growth prospects will become more prominent as the low-base effect fades.
  • Normalisation of monetary and fiscal policies.
  • Relative Rotational Graph (RRG) suggests a rotation from cyclical to growth sectors.

8. Sector Rotation Signals

• Weekly RRG: Materials is in the "Weakening" zone, and may soon be followed by Energy and Financials.
• Daily RRG: IT is already in the "Improving" zone, indicating a potential shift towards growth sectors.

Investment Recommendations

CMBIS Ratings

• BUY: Potential return of over 15% over next 12 months.
• HOLD: Potential return of +15% to -10% over next 12 months.
• SELL: Potential loss of over 10% over next 12 months.
• OUTPERFORM: Industry expected to outperform the relevant broad market benchmark.
• MARKET-PERFORM: Industry expected to perform in-line with the relevant broad market benchmark.
• UNDERPERFORM: Industry expected to underperform the relevant broad market benchmark.

Analyst Certification

• The research analyst certifies that all views expressed reflect personal opinions.
• No compensation is directly or indirectly linked to the views expressed.
• The analyst has not traded in the stocks covered in the report within 30 days prior to the report's release.

Important Disclosures

• This report is for informational purposes only and not investment advice.
• Past performance does not guarantee future results.
• CMBIS is not a registered broker-dealer in the US, and the report is only for major US institutional investors.
• The report is distributed in Singapore by CMBI (Singapore) Pte. Ltd., an exempt financial adviser.
• No reproduction, redistribution, or publication is allowed without prior written consent.

Contact Information

Daniel So, CFA
Phone: (852) 3900 0857
Email: danielso@cmbi.com.hk
Company: CMB International Securities Limited
Address: 45/F, Champion Tower, 3 Garden Road, Hong Kong

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