Everbright Securities: Focus on three types of HK stocks in July

China's economy is rebounding while overseas risks remain. Everbright Securities gives its Hong Kong stock strategy and key recommendation portfolios for July 2022.

The Hong Kong stock market's upward swing in June mainly resulted from favorable policies and improved China's economic fundamentals. With the overall release of China's epidemic control, the 33 economic stabilization policies in 6 areas introduced by the State Council in May were gradually implemented. Hong Kong stocks continued to rally in early June, driven by the positive economic performance of the mainland, and turned down in mid-June, largely due to concerns about the U.S. recession combined with liquidity tightening in overseas markets. U.S. inflation data in June exceeded expectations. PMI fell below 50%, triggering recession expectations. The Federal Reserve continued to raise interest rates, global liquidity tightened, and Hong Kong stocks went down. Hong Kong stocks rebounded in late June and eventually closed higher, mainly due to the opening of the interoperability mechanism overlaid with a steady recovery in China's economic fundamentals. The Hang Seng Technology Index, Hang Seng China Enterprises Index, Hang Seng Composite Index, Hang Seng Index, and Hang Seng Hong Kong 35 Index rose by +8.62%, +3.37%, +2.42%, +2.08%, and +1.45% respectively in June.

Social financing data in May was better than expectations, increasing by 2.79 trillion yuan, which is higher than the market consensus estimate of 2.37 trillion yuan (+839.9 billion yuan yoy). Economic activities recovery after the epidemic fueled social financing recovery.

The macro hedging policy continues to be vigorous, with tax retention rebates and special bonds as important tools. On June 1, the State Council executive meeting deployed to speed up the implementation of a package of policy measures to stabilize the economy. On June 7, the Ministry of Finance and the General Administration of Taxation jointly announced to further increase the implementation of the VAT tax retention rebate policy.

Monetary policy was dominated by quantitative tools, and innovation of structural tools was accelerated, focusing on stable growth and employment. On the aggregate side, monetary policy has generally been in an observation period since the successive lowering of the lower limit of the first-suite loan interest rate and LPR above 5 years in May, with the main focus on digesting the established easing policies.

At the FOMC meeting in June, the Fed decided to raise interest rates by 75 basis points in a non-conventional manner. Given the current strong U.S. job market, the U.S. economy has the buffer space to reach a "soft landing" in anticipation of a mild recession. If the U.S. economy sees a mild recession in late 2022 or early 2023, the actual impact on Hong Kong stocks will be limited.

Everbright Securities gives three focuses on HK stock industry allocation: 1) cost-effective Internet technology stocks with low valuation under the rebounding platform economic policies; 2) real estate companies that benefit from the expected rise in China's infrastructure; 3) the hotel, restaurant, tourism, and gaming industries that benefit from the easing of the epidemic.