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Public Equities

Hong Kong-China Equities: Attractive Valuations and Room for Earnings Growth

July 2024 – 3 min read

Company fundamentals that are likely to improve and the potential for positive policy surprises underly our constructive view of Hong Kong-China equities in the coming months.

As we enter the second half of the year, the market is focused on how decisions made at the Third Plenum and subsequent politburo meeting will affect China’s medium- to longer-term economic policies. The meetings come after an extended period of post-Covid normalization, with gradually increasing policy support this year. In our view, there is the potential for positive policy surprises given the current low expectations—which has been reflected in market valuations due to the government’s perceived priority on economic stabilization.

In addition, given the low-base effect, company fundamentals are likely to improve in the coming months. The recently introduced stock market reforms are incentivizing payouts to investors, alongside higher requirements for public listings. This, in our view, should help to improve the overall quality of the public equity markets, and should shift investor focus toward fundamentals over liquidity. We should also begin to see a greater number of IPOs coming to the market, which will offer a pipeline of higher quality exposure in Chinese companies.

After this year’s initial sell-off and subsequent rally based on liquidity and relative valuations, we have entered a phase of consolidation. The government’s policy priorities could pave the way for earnings growth, especially in companies that could benefit from either structural trends in China or globally, or due to significant mispricing of fundamentals.

That said, several external tail risks remain, especially pertaining to geopolitical risks. As we head toward the U.S. elections, China is likely to be the subject of calls for sanctions and containment, which could create bouts of sentiment-driven volatility. In Europe, the relative strength of right-wing parties could also lead to increasing frictions. However, it is worth noting that China's share of exports to emerging economies has been rising consistently, which should help to mitigate some of the impact.

Attractive Valuations 

In terms of valuation, Hong Kong-China equities are currently trading at the lower end of their historical range, which could represent attractive entry points for longer term investors. As the economy gradually normalizes, we are finding attractively priced, strong structural growth opportunities from a bottom-up perspective. Structural trends such as sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and environmental awareness, are likely to continue to unfold. This should bolster the outlook on sectors and themes such as new infrastructure, domestic consumption, health care, technology localization, and sustainability in the medium to longer term.

24-3741886

William Fong, CFA

Head of Hong Kong China Equities

The document is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This document is not, and must not be treated as, investment advice, investment recommendations, or investment research.

In making an investment decision, prospective investors must rely on their own examination of the merits and risks involved and before making any investment decision, it is recommended that prospective investors seek independent investment, legal, tax, accounting or other professional advice as appropriate.

Unless otherwise mentioned, the views contained in this document are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Parts of this document may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this document is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any forecasts in this document are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Any investment results, portfolio compositions and/or examples set forth in this document are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this document. No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments.

Investment involves risks. Past performance is not a guide to future performance. Investors should not only base on this document alone to make investment decision.

This document is issued by Baring Asset Management (Asia) Limited. It has not been reviewed by the Securities and Futures Commission of Hong Kong.

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