2H22 – Stay Nimble
We expect a challenging investment environment for China in 2H22 as its faces a
trifecta of shocks – China’s “zero tolerance” COVID-19 policy, the Fed’s monetary
tightening, and collateral damage from the Russia-Ukraine conflict, which leaves fullyear GDP growth at 4.0% for 2022. Our strategy for Chinese equities is to rotate out of
TMT in this rebound into more defensive sectors like communication services,
healthcare and utilities as we approach 4Q22.
• Stay nimble. Due to China’s COVID-19-related lockdowns in 2Q22, our expectation of a
meaningful 2Q22 rebound for MSCI China was dashed. But all is not lost, as increasing
official commitment to work resumption and acceleration of FAI implementation point to a
likely relief rally heading into 3Q22. However, considering this is taking place against a
backdrop of Fed tightening and slowing global growth, we set our 3Q22 target at 85pts,
implying 13.6% upside from current levels, but our year-end target is lowered to 65pts,
translating to 13.1% downside to current levels.
• Shaking the money tree. The mainstay of policy support this year will be fiscal spending
and government investment, with monetary policy set to play a supportive role. Apart from
FAI, various local governments have also introduced purchase tax cuts for ICE-cars and
subsidies for EV purchases. There are also consumption voucher schemes to boost
domestic demand, though the scale of such schemes remains relatively small. But we are
not expecting a sharp improvement in growth momentum, as the government is unlikely to
commit to sustained strong fiscal stimulus, given its implications for overall indebtedness.
Moreover, global growth is likely to stay on a downtrend as well.
• Zero-COVID stance remains a risk; lower full-year GDP growth forecast of 4.0% yoy.
As work resumption gets underway and the government pushes for faster FAI
implementation to stabilise growth, we expect 3Q22 real GDP growth to hit 2.2%, up from
the 1.9 % expected for 2Q22. But the lack of a clear exit strategy from the current zeroCOVID stance will likely dampen corporate and consumer confidence and hinder the release
of pent-up demand in 2H22. Consequently, we have lowered our 2022 GDP growth forecast
to 4.0% yoy.
• Risk of a pullback in 4Q22. The prospect of a weaker earnings outlook will see Chinese
equities trading lower going into 4Q22; there will be no decoupling for MSCI China from the
Fed’s quantitative tightening (QT). We expect the current consensus EPS forecast of 4.6%
for FY22 and 17.2% for FY23 to be revised down further, and for FY22 EPS growth to
eventually fall into negative territory. Apart from earnings impact, slowing growth in a higher
interest rate environment will compress fair value PE as equity risk premium rises.
• Sector allocation. In the near term, with the MSCI China index having underperformed
other emerging markets ytd, funds inflow will likely benefit index heavyweights initially,
followed by those that have underperformed due to the COVID-19 lockdowns. For the
recommended sector allocation, we prefer to gradually take profit on TMT and rotate
towards more defensive stocks as we approach 4Q22, and increase allocation to more
defensive sectors like communication services, healthcare and utilities. Remain
OVERWEIGHT on beneficiaries of the FAI push and pick-up in consumer staples or lower end consumption as households’ purchasing power is likely to be crimped in the near term.
• Thus, our key recommendations are:
a) Selective on TMT ? Index heavyweights will be key beneficiaries of renewed funds inflow
into Chinese equities. They are also less affected by commodity price increases
b) Healthcare – Focus on equipment and pharmaceuticals as contract research
organisations (CRO) could still be affected by geopolitics.
c) EV and renewables – Beneficiaries of China’s push to enhance energy security and
achieve carbon neutrality.
d) Reopening plays.
• Our key buys include AIA (1299 HK), BYD (1211 HK), CM Bank (3968 HK), CR Beer (291
HK), CR Land (1109 HK), Li Ning (2331 HK), Link REIT (823 HK), Longyuan Power (916
HK), Mindray (300760 CH), Minth (425 HK), NetEase (9999 HK), Pinduoduo (PDD US) and
Trip.com (9961 HK). Sell AAC Technologies (2018 HK).