Going into 2021, the pandemic is still taking centre stage. With vaccines being distributed at record pace, investor confidence in global economic recovery should be on the rise. Value stocks have been playing catch-up over the past two months, and we believe they will outperform again in Jan. We also prefer selective sectors that would benefit from China's policies.
- China market sentiment remain bullish on policy support. China's economic recovery began earlier than the West and has better visibility. Relatively more attention will be on policies in Q1. The “Two sessions” in which GDP growth target will be announced will be closely watched, and 2021 is the first year of the 14th Five-Year Plan. As such, we believe sectors which benefit more from the ongoing economic recovery or supportive policies would fare better in Q1.
- Weak USD lifts stocks. The USD has been on a downtrend in the past nine months, dragged by aggressive easing and twin deficits. A weak USD is naturally lending support to the CNY strength, which in turn bodes well for HK stock market’s earnings and valuations.
- Sector rotation from growth to value may go on, because 1) vaccination strengthens the case for global recovery; 2) valuation gap between value & growth stocks is still way larger than pre-pandemic peaks; 3) low-base effect for value stocks' earning in Q1; 4) Chinese internet giants are facing anti-monopoly policy risks.
- Technical Analysis: HSI shows some bullish signals, breaking downtrends and MACD signalling “buy". RRG shows cyclicals may maintain lead over growth stocks. U.S. stocks, on the contrary, seem poised for a correction, as there is a divergence in Dow Jones Industrial and Transportation.
- Strategy: Buy Value & Policy stocks. Expect cyclical stocks to continue to play catch-up in Jan, as they are more sensitive to the reopening of economy and have a stronger earnings recovery. Growth stocks are expected to underperform in coming weeks. Wait for a better entry point into internet stocks.
