Takeaway
? With the easing of the epidemic control, the resumption of work and production, and the ongoing
policy stimulus, the China’s equity market rebounded significantly in May, with both A shares and
Hong Kong stocks up.
? The divergence of policy cycles between China and US, EU is further widened, and the comparative
advantage of China’s equity market is highlighted. The Federal Reserve has accelerated rate hikes to
combat soaring inflation, the European Central Bank is also set to start raising rates in July, while
Chinese policymakers are firm on policy easing to stabilize economic growth.
? Leveraging on positive policy signal and market sentiment improvement, it is recommended to
increase allocation to the technology sector in Hong Kong stocks. Meanwhile, we recommend allocate
A-share assets that benefit from economic recovery and stimulus policies, such as consumer and solar
photovoltaic sectors.
Macro Views
• Inflation or recession? U.S. policymakers caught in a dilemma.
U.S. inflation remains at extremely high level, making it one of the biggest threats to economic growth. Driven by soaring energy prices and grocery prices, U.S. inflation surged beyond expectations in May, with the CPI up 8.5% year-on-year, the highest since December 1981, and higher than the previous value and the expected 8.3%; core CPI rose 6% year-onyear, down from 6.2% in the previous month, but still higher than the expected 5.9%. If converted to the Fed’s preferred measure of PCE inflation, on a 12-month basis, PCE inflation is around 6.6%, well above the Fed’s 2022 forecast of 4.3%.
Under inflationary pressure, the market generally expects the Fed to adopt a more aggressive rate hike strategy this year. At the June FOMC meeting, the Fed reiterated its high attention to inflation and its determination to fight inflation and announced the largest interest rate hike since 1994 by 75 basis points. Although the moves of this size will not be common, Fed Chairman Powell believes that either a 50 basis point or a 75 basis point increase seems most likely at the next meeting in July. Currently the market expects another 175 basis points of interest rate hikes to 3.25-3.5% by the end of 2022.
But monetary tightening could reinforce recession expectations. Under the “impossible triangle” of high interest rates, high inflation and high growth, adopting tightening policies to curb inflation will inevitably come at the expense of part of the economic growth. At the June FOMC meeting, the Federal Reserve lowered its economic growth forecast. The U.S. 10-year and 2-year yield spread, known as a classic indicator of recessions, inverted on Monday.
In addition, the Biden administration will also take actions to fight inflation. According to Gallup poll, inflation has become the most concerned economic issue for voters, and the economic confidence index is still in the negative range. The Biden administration is also taking or considering various measures to combat high inflation, such as announcing the release of oil from the Strategic Petroleum Reserve (SPR) at the end of March, considering removing or reducing tariffs on China, increasing domestic food supply to combat elevated food prices. However, from the perspective of the Biden administration, the measures it can take cannot cool down inflation in the short term as it will take time to be effective, but it may help the Democratic Party’s midterm elections.
?China?
• In April, the fiscal revenue in China dropped sharply by over 40%, but the follow-up fiscal stimulus arrangements are more worthy of attention and may become an important driver for the recovery of economic growth in the second half of the year. In April, fiscal revenue was dragged down by the decreasing growth rate of tax revenue, with the growth rate dropping by more than 40%. Local fiscal revenue in many first-tier cities such as Shenzhen and Shanghai dropped by more than 40%. The reasons are that 1) the epidemic resurged since the end of March, and many cities locked down, leading to the pause of economic activities. 2) the introduction of the tax reduction policies mitigated the cash flow pressure of corporations but also reduced the tax revenue for the government. The economic dilemma cannot be ignored, but we can pay more attention to the future fiscal stimulus in the future. We expect that the issuance and implementation of special bonds will be accelerated, tax reduction and fee reduction will continue, and strengthening of infrastructure investment are the main ways to implement fiscal relief and stimulus.
The pandemic control measures have been eased, and the temporary impact of the epidemic is expected to gradually subside. As the pandemic became under control in May, the freight and logistics situation in various cities gradually improved. The resumption of work and production is proceeding in an orderly manner. Although the manufacturing PMI is still in the contraction range, it rebounded in May. It is believed that with the easing of lockdown and control, the economy regains its growth momentum, and post-epidemic recovery has gradually become a new investment theme.
Regulatory concerns may have faded away. Since the turning signal of the regulatory policy in April,
recent high-level meetings have frequently raised support for the sustainable and healthy development
of the platform economy, and the regulatory concerns over Internet platforms have gradually subsided.
?L&I Views?
With China’s economic growth expectations and market sentiment improving, China’s equity market has seen the opportunities for rebound, but unresolved uncertainties bring the risks of market correction. Recommend leveraged and inverse products of Hong Kong stocks and A-share to maintain flexibility. In addition, monetary tightening continue to pose the pressure on the valuation correction of the US technology stocks despite good earnings performance, so CSOP NASDAQ-100 Index Daily (-2x) Inverse Product (7568.HK) could be an appropriate hedging tool.
The AH premium level remains high, and the Hang Seng Stock Connect China AH Premium Index was
137.417on May 31, 2022. Given that the AH premium trading strategy is generally valid in the process when the long-run mean reversion to 130 level, we still suggest to long CSOP CSI 300 Index Daily (-1x) Inverse Product (7333.HK) and CSOP Hang Seng Index Daily (2x) Leveraged Product (7200.HK) (short CSI 300 vs long HSI).
Market Overview
In May, US equities and Chinese equities diverged, with Hong Kong stocks and A shares recovering while US stocks weak.
- Affected by positive factors such as policy support and lockdown easing, the A-share market rebounded across nearly all sectors in May, especially the automobiles and photovoltaics. In addition, the northbound fund inflows accelerated, with the net fund inflow through stock connect in May reaching a new high since 2022. The FTSE China A50 Index rose 0.60%, the CSI 500 Index rose 7.46%, the ChiNext Index rose 3.86%, and the STAR 50 Index rose 9.41%.
- Hong Kong stock market continued its uptrend, with the Hang Seng Index up 2.13% and the Hang Seng
TECH Index up 0.60% in May. - US stock market was in a technical bear market in May, with technology stocks declining. The Nasdaq 100 fell 1.57%, while the S&P 500 recovered earlier losses at the end of the month to end the month up 0.13%.
- After falling sharply in early May, RMB turned volatile in late May. In the first ten days of May, the
onshore RMB/USD exchange rate dropped sharply from 6.6085 on April 29 to 6.7892 on May 13, and then
gradually stabilized into range bound. On May 31, the CNY exchange rate was 6.6718.
