• Multiple challenges gave the HK market one of its worst relative performance in 2021 
  • Risk appetite will improve as the government sought to stabilise the property market and regulations on industries are clarified
  • As confidence return with negatives priced in and valuations at attractive levels, new economy names with superior secular growth are the best way to play the likely rebound
  • Our 12-month HSI target at 28,500, pegged to 12.1x FY22F PE

Challenging macro with lingering overhangs priced in. We expect China to have a slower GDP growth of 5.3% in 2022. Market overhangs in 2021 (e.g. the property sector) and regulatory development in various sectors will likely linger. Rising cost of raw materials will be more apparent, while we expect the Fed to hike rates twice in 2H22. Chip shortage and transportation bottlenecks are likely to persist in 2022. Sporadic COVID-19 resurgence like the Omicron variant will continue to undermine investors’ confidence.  All that being said, we think much of the current overhangs are already fully factored into the HK market, which YTD has dropped 13.9% and is one of the World’s worst performing major index.

Confidence to resume as government actions stabilise: HK market’s valuation looks attractive and hard to ignore. Given the diverging fortunes, the valuation gap between HK and US markets has doubled. While we cautiously navigate through 2022, where uncertainties remain, this attractive valuation is hard to ignore. The index is currently trading at 10.2x FY22 PE which is equivalent to -1 SD of its 5-year average. Our base case 12-month HSI target is 28,500, implying a 18% potential gain from the current level, and is set at 12.1x FY22 and 10.6x FY23 earnings, equivalent to its 5-year average one-year forward PE.

New economy names are the best way to play the likely rebound. We believe heavily regulated sectors and companies that have already been penalised like internet sector are more likely to escape further regulatory action. Sectors that can support President Xi’s pledges like renewable energy are in a better position to shine. We think the financials and property sectors stand to benefit from the upcoming interest rate upcycle.