CICC released a research report saying that it is expected that intensive policy expectations at the end of the year or the first and second quarters of next year, the slowdown in US bond interest rates, and the easing of the geographical situation may all contribute to a wave of restorative rebound. At this time, the flexibility of Hong Kong stocks may be greater than A-shares, and industries that are highly elastic and interest-sensitive may benefit more, such as biotechnology, technology hardware, the Internet, and new energy. In terms of thematic investment opportunities, CICC suggests focusing on several aspects: sensitivity to falling interest rates, liquidity of Hong Kong stocks, long-term financial center positioning, high dividends, and corporate governance appeal.
After the restoration is completed and until more “symptomatic” policies are introduced, CICC proposes to use the “pick up the cheap” strategy to deal with possible consolidation, continue to follow the “dumbbell” structure that combines offense and defense, and configure the three main lines of long-term dividend capacity (telecommunications, energy and utilities), high-end technology upgrading (technology hardware, semiconductors and biotechnology), and going overseas (construction machinery, automobiles and components, new energy and photovoltaics, some products and brand consumption, etc.).
Macro environment: The core of breaking the game is growth, the key to growth is credit, and the gripper for credit is finance
The ups and downs of Hong Kong stocks since this year reflect the combined effects of internal and external factors. Behind the sharp rise at the beginning of the year was a simultaneous improvement in the Chinese molecular side (domestic growth) and the US denominator side (financing costs). The turmoil in the second quarter was a correction to excessive expectations, while the increase in pressure after the third quarter caused the US denominator and the Chinese numerator to break position again. Therefore, looking ahead, interest rates on US bonds peaking and declining at the beginning of next year, and the strengthening of China's “symptomatic” policy (leveraging by the central government) can all provide similar opportunities for a rebound, but the trend after the rebound depends on endogenous growth. Otherwise, 2019 will be no different from the beginning of this year.
The key to steady growth is credit leniency. Since this year, the late arrival of credit relief has made it impossible to effectively unleash the effects of monetary easing, mainly because lower return on investment expectations have temporarily curtailed the private sector's willingness to invest. CICC estimates that the return on investment of residents and the business sector is generally below or close to the corresponding financing costs. At the same time, the increase in public sector credit, or fiscal deficit, is slower than last year. The fiscal deficit pulse is at a new low since 2021, and the overall trend is tight. Therefore, in the face of the private sector's willingness to remain sluggish in the short term, finance has become the main trigger for credit leniency. This not only explains why the market's lackluster reaction under many policies since July, but also fully explains the importance of the recent increase in treasury bonds (“The meaning of the central government's leveraged market”). In other words, leveraging by the central government is in the “right” direction. However, considering the “shelf life” of the policy, if the follow-up scale is larger and faster, the positive feedback on the market and profits will also be stronger.
In addition to this, first-tier real estate is also important for stabilizing expectations and stabilizing leverage. At the same time, further reducing financing costs will also help boost the private sector's willingness and ability to leniency. The Fed's cessation of interest rate hikes and the fall in US bond interest rates will provide a policy window. These may also be opportunities for market sentiment to improve.
Market trend: gradual bottoming out, benchmark situation 10-15%; rebound is not difficult, reversing to “symptomatic” policies
Based on the assumption that policies are progressing gradually and interest rates on US bonds are gradually falling, CICC believes that Hong Kong stocks are in the process of gradually bottoming out, and that the benchmark situation has room to rise by 10-15%. Currently, the market is at the “policy bottom,” but it will still take time to transition to the bottom of sentiment and market. From the end of this year to the beginning of next year, under the combined impetus of falling US bond interest rates, the strength of China's policies, and the improvement of Sino-US relations, it is not difficult for a restorative rebound to occur; there is more room for more “symptomatic” policies.
Under the benchmark scenario, CICC expects Hong Kong stocks to profit 4.5% in 2024 (non-financial 4.7%, corresponding real estate growth rate 7%), a moderate recovery from this year's growth close to zero; valuations expand 7% (implying 3.9% of US debt, risk premium falling from 8.2% to 7.8%), corresponding to 10-15% index space. If policy progress exceeds CICC's expectations, then the index space may expand to 25% (corresponding to 10% profit, 15% valuation). On the contrary, the main downside risk of CICC's judgment is that the introduction of a “symptomatic” policy is weaker than expected. At this time, corresponding to a 0% increase in profit, the index may fall slightly by 5% following the contraction in valuation.