HK & China equities’ strong run in early Jul did not sustain, and may well consolidate further in the near term, but a weak USD should lend support to emerging markets and in particular China. U.S.-China tension will probably cap upside though, and the HSI may remain range bound. We favour sectors which benefit from fiscal & monetary policies as well as reforms.
- Short term: Liquidity waning. After a sudden spike in early Jul, HK & China stock markets retreated, with a few worrying signs, incl. turnover coming down, net outflows in northbound trades, and higher turnover on down days. These are not suggesting a prolonged down market though, as unlike in Apr-Jun 2015, this recent strong run did not show any bubbles or exuberance.
- Medium term: Benefit from weak USD. U.S. equities’ valuation premium over emerging markets is at the widest at least since 2007. With the USD weakening, there could be some rotation from the U.S. to EM. China stands out from other major EM countries as far as COVID-19’s impact and economic recovery are concerned. On the negative side, China has its own risks from the tension with the U.S.
- HSI expected to be range bound in 23,800-26,200. As liquidity has been waning in the short term, the HSI may test the uptrend support at ~24,000 before rebounding. Resistance would be at long-term downtrend at ~26,200. This in in line with our base-case forecast of target range 23,800-26,200 based on fundamentals.
- Investment themes which ride on policies. 1) Infrastructure: we expect China’s infrastructure investments +12% in 2020 (v.s. -2.7% in 1H), boosted by strong growth in issuance of special purpose government bonds; 2) Consumer: China’s economic policy will centre on “internal circulation”, supplemented by “external circulation”, which means more focus will be placed on boosting domestic output and consumption; 3) Brokerage: leading brokerage firms would benefit from China’s capital market reforms, and catalysts in Aug include the listing of first batch ChiNext IPOs under registration-based system; 4) Gold: QE and negative real interest rates are the two major driving forces behind the surge in gold price.
