In light of a diverging policy trend, we look at HK and Chinese equities markets performance in previous cycles to gauge any guidance from historical performance. Chinese onshore equities market has been more responsive to Chinese easing cycles since 2015 and the onshore A-shares mid-caps (i.e., CSI500) delivered the strongest outperformance three-months after the rate cuts announcement. During the previous US rate hike
cycle in 2015-18, HK and Chinese equities markets delivered negative returns one-month prior to and one-month after the hike in end-2015 with Hang Seng Index performed the best among the three indexes. Heading into the rate hike cycle, HK and Chinese equities posted double-digit positive returns 3-month post the last rate hike in Dec-18 on improving growth outlook.
We maintain our preference to the onshore A-share market and we also prefer Hang Seng Index (HK equities) owing to its relatively high exposure to the financials sector which would benefit from the US
Fed rate hike cycle. Our pecking order at the index level is CSI300 (the onshore A-share market) > Hang Seng Index (HK equities) > MSCI China (the offshore Chinese equities market). Despite that there are several challenges and overhangs in place in the near-term for the offshore MSCI China index, valuation has become more attractive with forward P/E multiple has retrenched to below historical average level and is trading at a discount to MSCI Emerging Market. In the near-term, MSCI China could stay range-bound in light of Chinese New Year holiday and the market would wait for more pro-growth supportive policies in the upcoming NPC. In the medium-term, we are getting more constructive on MSCI China after the upcoming results season in March as the pressure of earnings downward adjustment moderates and further supportive policies and measures to support growth.
We prefer HK financials and key investment themes that could benefit from policy tailwinds: i) decarbonization, ii) onshore sourcing and import substitution, iii) new infrastructure, and iv) domestic
consumption. In the near-term, there would be trading opportunities for Chinese banks (for its relatively high dividend yield in the coming results announcement in March), a relief rebound in Chinese properties (to rotate out from low quality developers), and selected infrastructure and building materials. (Research Team)