From a deep misfortune comes a bliss!
Stocks in Greater China have risen since the start of the Year of the Dragon. In February, the A-share CSI 300 Index rose 9.4%, leading the world's major markets, after half A year, finally ushered in the monthly red end; Hong Kong also enjoyed a turnaround in February, with the Hang Seng Index up 6.6 per cent; Nvidia's stronger-than-expected results and strong guidance drove another rally in AI-related stocks and pushed the Taiwan stock index to new highs; The MSCI index of Shanghai, Shenzhen and Hong Kong investable markets is up 9.3 percent this month.
Around the Spring Festival, various government departments have effectively introduced a series of measures to inject vitality into the economic development, find impetus for the stability of the stock market, and provide support for the boost of investor confidence. First, Premier Li Qiang pledged in his New Year address to take "pragmatic and forceful" measures to boost investor confidence in the economy and stock market. Second, after the central bank cut the reserve requirement ratio for commercial banks by 50 basis points, commercial banks cut the five-year loan quotation rate (LPR) by a record 25 basis points to 3.95 per cent, and allowed many parts of the country, including Beijing and Shanghai, to lower the floor of mortgage rates for home buyers, aiming to stimulate sluggish housing demand; In addition, the chairman of the Securities and Futures Commission was replaced; The "national team" continues to purchase admission. After restricting the conversion of locked-in shares, management tightened IPO approvals and placed numerous restrictions on high-frequency quant trading, even though the liquidation of quant and high-frequency trading strategies would lead to forced selling of some stocks and affect the stock market. On the demand side, commercial banks have cut deposit rates one after another. We are pleased to note that corporate share buybacks also hit A record high in January (RMB14 billion for A-shares and HK $21 billion for Hong Kong share buybacks).
It seems that the real economic data has not yet reflected the implementation of the various super policies of the government. CPI continued to be negative in January (-0.8%), mainly due to falling food prices (-5.9%); Manufacturing activity continued to contract (PMI 49.2), but services improved slightly (non-manufacturing PMI 50.7). Despite the overall increase in New Year travel, average spending was still 21% lower than the same period in 2019, indicating that consumers have less spending power in the face of rising unemployment and a weak housing market. China's 10-year bond yield weakened further to 2.35 per cent and now trades at a discount of more than 190 basis points to its US counterpart. With US dollar interest rates still high, Hong Kong property still faces significant challenges, and the government's recent removal of all measures to manage residential property demand is a response to this challenge.
We do not believe this market rally will be short-lived. The most important policy signal is that the Chinese government's policy focus will shift from emphasizing supply-side reforms to boosting demand-side reforms, which is a big positive for the market. The Financial and Economic Commission of the CPC Central Committee stressed that it is necessary to guide a new round of large-scale equipment renewal and the replacement of old consumer goods with new ones, and effectively reduce the logistics costs of the whole society. Policymakers may realize that the main challenges facing the Chinese economy today are not on the supply side, but on the demand side, highlighted by falling property sales, weak consumer demand, and persistent deflation. We will actively explore investment opportunities brought about by demand-side reform.
We believe that with the convening of the "two sessions", the policy on demand-side reform will be clearer; At the same time, with the implementation of a series of policies, economic recovery signals and investor confidence will be restored.
The following sectors benefiting from policy priorities will benefit:
Next-generation information technologies (5G, smart cars, artificial intelligence, industrial automation, etc.); Import substitution (Self-Reliance) - integrated circuits, optical modules and high-end manufacturing; Beneficiaries of a recovery in consumption; Beneficiaries of the new energy era, especially storage and automation; And Greater China Healthcare - particularly in innovation (devices and drugs), IVF, geriatric care and surgical recovery.
