Market Trend Review

Last week, the overseas Chinese-funded stock market consolidated in a narrow range as a whole, and continued to digest many internal and external uncertainties, such as further panic selling in U.S. stocks and the continued challenge of the epidemic to China’s economic growth. At the index level, the Hang Seng Technology Index was basically flat (0.07%), while the Hang Seng Index, MSCI China Index and Hang Seng China Enterprises Index fell 0.52%, 0.17% and 0.04% respectively. In terms of sectors, healthcare, utilities and capital goods led gains, rising 2.7%, 2.6% and 2.3%, respectively, while insurance, consumer discretionary and real estate fell 2.2%, 2.1% and 2.0%.

Exhibit 1: MSCI China lost 0.2% last week, with insurance and consumer discretionary sectors underperforming

Market Outlook

Although the volatility of the external market continued or even more intense last week, the performance of overseas Chinese stocks showed some resilience, at least compared to last week. It is true that it is too early to judge that the Hong Kong stock market will be “immune” to external fluctuations, but the low valuation level is expected to provide some support for the market, which can also explain why the inflow of southbound funds in the second half of the week was significant. rising.

In the external environment, the U.S. April CPI data exceeded expectations and failed to alleviate the market’s concerns about inflationary pressures, and even led investors to worry that the pace of monetary tightening was forced to accelerate before inflation was controlled, which may trigger a premature economic recession. Affected by this, US stocks continued to be turbulent last week, especially the growth sector was under pressure again, and Hong Kong stocks were naturally affected to some extent.

In addition, the appreciation of the US dollar led to a new round of rapid depreciation of the RMB and the Hong Kong dollar. The offshore renminbi against the US dollar broke through the 6.8 mark, while the exchange rate of the Hong Kong dollar against the US dollar touched the weak-side convertibility guarantee of 7.85, allowing the Hong Kong Monetary Authority to inject liquidity into the market to maintain exchange rate stability. Although the HKMA’s market intervention operation is completely normal under the linked exchange rate system, it still shows that the Fed has entered a stage of accelerated tightening, which will inevitably lead to tight global dollar liquidity.

But on the positive side, southbound capital inflows have provided some support for the Hong Kong market. Last week, the pace of southbound capital inflows accelerated significantly, and the inflow scale exceeded the previous week by as much as 6 times, which was in line with our previous expectations. Looking forward, considering the overall loose domestic liquidity and the comparative advantage in the valuation of the Hong Kong stock market, we believe that the trend of southbound capital inflow since December last year may remain unchanged.

Domestically, the challenges of economic growth are intensifying, and more policies to stabilize growth are needed. Key recent disclosures highlight the impact of the escalating outbreak:

Going forward, we think it may still take some time for the market to digest external uncertainties, not to mention that the impact of the epidemic on the real economy will continue in the short term. However, we believe lower valuations and policy support will provide downside protection, as exemplified by the recent acceleration of southbound capital inflows.

Variables to watch closely in the future include:

In terms of sector allocation, we believe that high-dividend-yielding targets and high-quality growth stocks will provide investors with more protection in the current market volatility. If more policies are introduced in the future, the targets that benefit from stable growth are also worthy of attention.

Chart 2: HKD/USD hits weak-side convertibility guarantee of 7.85

Specifically, the main logic supporting our view and the factors that need attention last week mainly include:

1) Macro: Repeated epidemics and geopolitical conflicts continue to drive up inflation in China. Affected by the epidemic prevention and control, logistics obstruction and hoarding behavior have pushed up domestic food prices. In April, the year-on-year increase in China’s official CPI climbed to 2.1% from 1.5% in March. Among them, the prices of vegetables, fruits and eggs rose by 24%, 14.1% and 12.1% respectively year on year.

At the same time, as the conflict between Russia and Ukraine continued to push up international commodity prices, the PPI in April rose by 8.0% year-on-year, which was slower than the 8.3% in March, but still higher than market expectations for three consecutive months. The CICC Macro Group predicts that the PPI center in 2022 may be around 6%, and the CPI may remain moderate throughout the year. It is expected that geopolitical conflicts will have a longer impact on supply, and repeated epidemics will have a longer impact on demand.

In the context of epidemic prevention and control, exports were weak in April. The year-on-year growth rate of China’s exports slowed sharply to 3.9% in April from 14.7% in March, due to the high base and the hampered logistics and factory production caused by the epidemic. The expansion of production in some Southeast Asian countries has also replaced China’s exports to a certain extent. Meanwhile, imports were flat year-on-year in April, following a 0.1% drop in imports in March. In particular, it should be pointed out that the import and export of high-tech products has declined significantly, while the growth rate of raw material imports has accelerated under the background of the steady growth policy.

Figure 3: China’s April CPI and PPI rose 2.1% and 8.0% YoY

Figure 4: China’s exports grew 3.9% in April, a sharp slowdown from 14.7% in March

2) Monetary policy: Affected by the epidemic’s curbs on credit demand, April financial data was significantly lower than market expectations. On Friday, China released data on new social financing and credit in April, which was significantly lower than market expectations. Specifically, the new social financing in April was 910.2 billion yuan, significantly lower than the 4.65 trillion yuan in March, a year-on-year decrease of 946.8 billion yuan. The main drag on the sharp decline in new social financing was that new RMB loans were only 645.4 billion yuan in April, significantly lower than the 3.13 trillion yuan in March, reflecting the relatively sluggish demand for credit against the backdrop of the epidemic. Residential housing loans decreased by 60.5 billion yuan in April, a decrease of 402.2 billion yuan year-on-year.

In particular, it should be pointed out that, driven by fiscal expansion, the growth rate of M2 money supply in April rose by 0.8 percentage points from the previous month to 10.5%. The People’s Bank of China said in the “Monetary Policy Implementation Report for the First Quarter of 2022” released last Monday that it will increase support for the real economy and maintain reasonably sufficient liquidity.

Figure 5: The new social financing in April was 910.2 billion yuan, significantly lower than the 4.65 trillion yuan in March

3) In the face of the devaluation of the Hong Kong dollar, the Hong Kong Monetary Authority intervened in the market to stabilize the exchange rate of the Hong Kong dollar. For the first time since 2019, the exchange rate of the Hong Kong dollar against the US dollar touched the weak-side conversion guarantee of 7.75-7.85. The Hong Kong dollar has continued to weaken recently, mainly due to rising interest rates in the United States and the continued abundance of liquidity in the inter-bank market in Hong Kong, which has led to increased pressure on capital outflows against the backdrop of the rapid expansion of the interest rate gap between the US dollar and the Hong Kong dollar. In Hong Kong’s linked exchange rate mechanism, the Hong Kong Monetary Authority bought 8.5 billion Hong Kong dollars from the market last Thursday and Friday to stabilize the Hong Kong dollar exchange rate. This is also the first time the Hong Kong Monetary Authority has intervened in the market since October 2020. Going forward, given that the carry trade of rising US interest rates is likely to continue, we believe that the MAS will continue to take similar interventions to maintain exchange rate stability in the coming months.

4) MSCI publishes the May 2022 semi-annual index review results for all its indices. The MSCI China Index added 33 constituents, while removing 45. We recommend paying attention to the potential positive impact of this adjustment on OOIL, Xtep International, Yitai B, Bubble Mart and JD Health, as well as the potential positive impact on Bohai Bank, Hwabao International, R&F Properties, Lee & Man Paper, Wharf Group and potential negative impacts from Sun Art Retail. All of the above adjustments will be implemented after the market closes on May 31 and will take effect on June 1.

5) Liquidity: Southbound funds continued to flow in last week, while overseas funds turned into net outflows. The average daily net inflow of southbound funds last week was 5 billion Hong Kong dollars, which has accelerated compared with the 1.7 billion Hong Kong dollars in the previous week. Mainland investors mainly bought Meituan and Tencent and sold Country Garden and China Shenhua. At the same time, a total of 1.4 billion US dollars of overseas funds flowed out of the Hong Kong stock market (as of last Wednesday), of which active and passive funds both flowed out, and their outflow scales were US$680 million and US$750 million respectively.

Figure 6: Southbound funds continued to inflow last week, while overseas funds turned into net outflows

Investment Advice

Overall, we believe that the short-term market will continue to consolidate, investment sentiment still needs time to recover, and more favorable policies are expected to be introduced. We judge that opportunities outweigh risks in the medium term. In terms of sectors, we believe that high dividend targets and low valuation targets, such as some financial, telecom and energy sectors, will provide investors with more protection in the current market volatility. At the same time, we recommend focusing on high-quality growth stocks that have sufficient valuation corrections but are less affected by the overall macro environment and can still provide steady growth.

Focus on events

1) China’s economic growth and policy changes; 2) Geographical situation; 3) Epidemic changes; 4) Sino-US relations.

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