We expect a longer and more profound impact from the current regulatory cycle on valuations and Equity Risk Premium (ERP) for China’s equity market than has occurred in similar past cycles:

Three key reasons make us convinced that Chinese equity market valuation will likely fall towards our June 2022 base case P/E target of 13x for MSCI China from current 13.7x level, rather than reversing the recent substantial de-rating from ~18x in mid Feb.

• The changes are an integral part of long-term national growth plan;

• Regulation is affecting a more substantial proportion of the market than previously and in particular the internet sector (mostly ADRs where foreign ownership is higher vs. HK listed and A-shares), which accounts for ~40% of MSCI China by index weight.

• There is a substantial degree of uncertainty over what this regulatory cycle means both for future net income margins and revenue growth for the affected sectors and stocks.

How to position – avoid ongoing headwinds and align with the tailwinds:

Taking into account the framework for ongoing regulation suggested by our economics team, we summarize markets, sectors and segments that could potentially suffer or benefit as a result ( Exhibit 24 ).