2021 China Economic Outlook: Growth spurred by both demand and supply
Key macro themes in 2021
- Demand-side catchup. While production resumed faster in time of COVID-19 this year, the demand-side lagged behind. There remains sizable room for improvement in 2021 regarding consumption and service sector development as economic growth picks up.
- Unbalanced recovery. In post-pandemic period, divergence shows up between sectors, industries and various participants of the economy. For example, traditional industries (or the old-economy sectors) may straggle from slower rebound; medium and small firms face greater challenges and low-income households are likely to suffer from more negative wealth shocks.
- Evolving US-China relations. While in the near term, US and China may find more common ground for cooperation and tariff wars may cease, strategic competition prevails in the longer run. The U.S. may reestablish its ties with allies under the Biden Administration and pressure China using multilateral mechanisms.
2021 HK Market Outlook: Value stocks to catch up in medium term; Growth stocks still prevail in the long run
Vaccination strengthens the case for global recovery
- There have been a series of positive news of COVID-19 vaccines since Nov 2020, and some countries have already begun vaccination. For months investors have been looking forward to a global economic recovery, and mass vaccination is strengthening the case for a strong recovery. Major central banks are going to remain highly accommodative in 2021. Cyclical indicators such as PMIs, copper price, shipping rate, as well as inflation expectations have been rebounding strongly. Corporate earnings are expected to follow suit, with consensus forecasting ~20% earnings growth in the U.S., China A-shares and HK stock markets.
Strong CNY bodes well for HK stocks’ earnings and valuation
- We expect CNY to stay strong and appreciate mildly against the USD in 2021. A strong CNY typically boosts the earnings of HK stocks / H-shares, and also support their valuations.
H-shares attractive as AH premium surged to decade-high
- A-shares’ premium over H-shares have surged to over 40%, a decade high. When AH premium is relatively high (>25%), Southbound net buying tends to increase and help H-shares’ performance. History also suggests that when AH premium was high, the probability of H-shares outperforming A-shares in the next three months increased slightly.
Index target ranges：HSI 23,600 – 30,000，HSCEI 9,200 – 12,000
- We apply a target P/E range on both the HSI and the HSCEI, based on an average of 2021E and 2022E consensus earnings, as we believe investors would look through the unusually low earnings in 1H 2021 which would still be heavily affected by the pandemic.
- The low end of the P/E range of the HSI is set at 10.0x, slightly higher than the trough levels 9.5x in the past decade, as the HSI has recently included more growth stocks such as Alibaba (9988 HK), Meituan (3690 HK), Xiaomi (1810 HK), and thus should enjoy a higher P/E multiple.
Sector rotation: Value stocks to outperform in Q1/1H 2021
- We believe value stocks (aka cyclical / old-economy stocks) is more likely to outperform in 1H 2021, as they are more sensitive to economic cycles, and thus usually stage a stronger rebound after an economic recession and during the first phase of recovery.
- However, beware of a potential pullback in the broad market in Q2 2021, as both the U.S. and HK stock markets typically had corrections in the fourth quarter of economic recovery. Given the global economic began recovery in Q3 2020, Q2 2021 could be a tricky period.
- Looking further ahead, when the pandemic’s impact fades away, and economic growth returns to a more normal level, investors would probably still prefer growth stocks which have higher growth and earnings visibility. Seize any pullback opportunities during mid-2021 to accumulate structural growth stocks such as internet giants and top consumer brands.
