Market Strategy
2H21 – Stocks For Uncertain Times
We expect a challenging investment environment in 2H21 due to cost pressures,
component shortages, slowing growth, funding issues and implications of a
forthcoming Fed taper. This should lead to a pullback of at least 10% in 3Q21. So for now we have our major OVERWEIGHTS in consumer staples, financials, healthcare and utilities and look to raise allocation to growth sectors after the expected pullback. Our year-end target for MSCI China stays at 117pt.

 Growth to slow. Our full-year GDP growth forecast stays at 8.2% yoy as a falling credit impulse, component shortages and high raw material costs weigh on industrial activities. For 2022, we forecast real GDP growth to slow to 5.3% yoy, on continuation of a prudent policy stance and weaker fixed asset investment growth due to increasing investments in technology rather than traditional roads and bridges. On the renminbi, we expect the US$/Rmb rate to hit 6.30 by end-22. Limited appreciation is expected as the US taper would likely have begun by then.

 Risk of near-term pullback. Given these challenges, the consensus EPS forecast should see further cuts in 2H21. The 2021 and 2022 EPS estimates have fallen to $6.39 and $7.48 respectively and are at the lowest recorded ytd. The biggest EPS cut has been in consumer discretionary − only four sectors managed to have the EPS lifted, ie energy, industrials, IT and utilities. Our dividend discount model (DDM) for the MSCI China Index has a fair value of 95.33pt, pointing to more than 10% downside in the near term. Investors should gain greater clarity over the Fed’s taper plans by mid-3Q21 (Jackson
Hole meetings) and with US President Joe Biden’s stimulus plan pushing ahead, we are keeping our year-end index target at 117pt.

 Sector allocation. We expect cyclicals to underperform in early-2H21, and would only recommend rotating into growth sectors (electric vehicles (EV) and technology, media and telecoms (TMT)) upon a market pullback. These are sectors which we still like on a medium-term outlook. As for now, we will have our major OVERWEIGHTS on consumer staples, financials, healthcare and utilities, which are relatively defensive. We have lowered consumer discretionary to MARKET WEIGHT due to the relatively demanding
valuations for sportswear and automobile OEMs, while the property sector stays as an UNDERWEIGHT due to policy headwinds.

 Stock picks. We recommend focusing on defensive plays or companies with strong cash flows, ie CCB, China Education Group, China Longyuan, Ever Sunshine, Innovent and Sino Biopharm. We continue to like beneficiaries of the economic reopening (Link REIT and, mass market consumption (CR Beer, Jiumaojiu and Wuliangye) and robust or improving industry outlook (Estun Automation, Kingboard Laminates and ZTE).