Hong Kong-China Equities: A Possible Upturn Ahead?
As hopeful signs appear—from positive policy steps to an improving economy—the time for some optimism on Hong Kong-China equities appears to be approaching.
Weak investor confidence in Chinese equity markets continued in the first quarter of the year on a dearth of positive news. However, the emergence of some positive policy steps as well as continued improvements in the economy are reasons for a constructive view on Hong Kong-China equities.
We expect that the People’s Bank of China will continue to maintain a dovish position in its monetary policies to ensure ample domestic liquidity for businesses. But in addition to possible further reductions in reserve requirement ratios (RRRs) and/or loan prime rates (LPRs), the government is likely to focus more on fiscal policy, where we could see an increase in spending to support business and consumer confidence.
Domestic consumption is gradually improving, with the Lunar New Year holidays recording per capita spending and passenger traffic that surpassed that of 2019. The first quarter also saw the introduction of “consumption trade-in” programs, which aim to stimulate domestic consumption spending, especially for household durable items. The potential launch of a revised, but limited-scale “shanty town” reform also should encourage broader economic activity.
Signs of marginal improvement in developed markets—inflation moderating in the U.S. amid a tight labor market, a slowly recovering European economy, and growth in domestic wages in Japan—should pave the way for stronger demand in China. This should likely benefit export-driven manufacturers in the country. Furthermore, the likely pivot of the U.S. Federal Reserve toward interest rate cuts this year should also be supportive for emerging market equities, including Hong Kong-China markets.
Attractive Valuations Create Opportunities
In terms of valuation, Hong Kong-China equities are currently trading at the lower end of their historical range, which could represent attractive levels of entry for longer-term investors. As the economy gradually normalizes, we are finding attractively priced, strong structural growth opportunities from a bottom-up perspective, which could positively contribute to our relative performance in the months to come. If that trajectory were to unfold, structural trends such as sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and environmental awareness, would continue to unfold. This should bolster the outlook in sectors and themes including new infrastructure, domestic consumption, health care, technology localization, and sustainability.
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