Over the past month, MSCI China (-3.3%) has underperformed CSI300 (+4.9%) by 8ppt. Despite the relative outperformance, we maintain our relative preference to A-shares as it has i) limited exposure to internet and platform sectors, ii) more industries to benefit from policy tailwinds and iii) lower correlation with other equity markets. The performance of MSCI China has been dragged by Chinese ADRs on the concerns about delisting risks in light of the implementation of Holding Foreign Companies Accountable Act. In this note, we highlight key concerns, and we view that the Chinese ADRs delisting should be a manageable risk. We have a Neutral stance on MSCI China as earnings downward revisions are likely to continue, but we are closely monitoring the window for a potential upgrade and are watching for a more consistent pro-growth policy tone and stabilisation in earnings downward momentum.
The November credit data, together with the comment at the December Politburo meeting and the reserve requirement rate cut announced last week, signaling that a policy inflection towards countercyclical easing is in the making. The Central Economic Work Conference (CEWC) will be held next week. While it does not announce any quantitative targets, it sets the policy stance for next year and growth targets to be endorsed at the National People’s Congress (NPC) in March next year. We will watch out if more policy measures could be unveiled between the CEWC and the NPC.
While further earnings downward revision is likely to persist, we advocate investors to adopt a barbell strategy, and prefer i) companies and sectors with policy support to drive growth and ii) those with strong cash flow and dividend support. While the road to recovery for internet and platform companies remains a long and bumpy one, there could be a window of trading opportunity before the next quarterly results announcement, where a reality check will shed light whether earnings downward revision will stabilize or not. With a stable dividend payout ratio and a relatively high dividend yield, a trading opportunity for Chinese banks is approaching towards 4Q21 results announcement. For investors focusing on long-term structural growth, we reiterate our preference to renewables and new energy vehicles sectors. While we believe domestic consumption would be a key beneficiary from “Common Prosperity”, the Covid-19 outbreaks and the “Covid-zero” strategy have weighed on consumer sentiment.