- Strong determination by policymakers to strive for a higher growth target this year should be beneficial in restoring investors’ confidence, in our view.
- A new round of reforms to revive long-term growth momentum, compelling valuations, and the peak in US dollar should also encourage fund inflows.
- We hold a constructive view on the HK market; expect 20% upside potential.
- We are Overweight on Consumer Discretionary, Communication Services, Information Technology (upgrade from Neutral), and Insurance sectors. Analyst(s)
Higher GDP growth target to help improve investor confidence
The new slogan “promoting stability using progress”, introduced during the annual Central Economic Work Conference, demonstrates policymakers’ strong determination to strive for an aggressive GDP growth target in 2024F. By stabilising the labour market and property sector, and preventing deflationary pressure from becoming self-fulfilling, we expect a higher growth target to help restore business and household confidence, and in turn lift investors’ confidence in China’s stock market. Policymakers also announced a new round of structural reforms on the fiscal and tax system this year, which should help revive China’s long-term growth momentum, especially household consumption potential. We view the risk-reward for China stocks as attractive. Valuation is already at the low-end of its five-year historical range, with Hang Seng Index trading at 1.5 s.d. below five-year historical average, and only 15% above the Oct 22 trough level. Meanwhile, earnings growth outlook remains solid (2023F: 22%, 2024F: 10%). The peak in the US dollar strength would likely encourage fund inflows to emerging markets, as historical data show strong negative correlation between US dollar index and emerging market stock performances. Foreign fund outflows from the China market showed signs of abating in Nov-Dec 23, based on northbound stock connect data. We hold a constructive view on offshore Chinese equities.
Expect more proactive, intensive and frontloaded policy support
GDP growth target is likely to be set at “around 5%” for 2024F, in our view. Ensuring the achievement of the growth target calls for significant step-up in policy support. We expect overall policy response to shift from a reactive mode to a more proactive one. The intensity of policy support for 2024F will be much higher compared to 2023 and the pace will be more frontloaded. Fiscal policy will do the heavy lifting of boosting growth, while an easing monetary policy stance will be maintained. Central government will likely take on more leverage and shoulder greater spending responsibilities. Meanwhile, local governments will continue to focus on defusing hidden debt risk through debt swapping and restructuring. Property policy will focus on breaking the negative feedback loop between developer stress and weak housing demand, by further relaxation of home purchase restrictions and stepping up financing support for developers. “Three major projects” will play a key role in offsetting the decline in commercial residential property investment and we expect low-cost funding to be provided for these projects through Pledged Supplementary Lending (PSL).
We project 12-month upside of 20% for Hang Seng Index
Our 2024F year-end index targets are 20,400 for Hang Seng and 67 for MSCI China Indices, based on forward P/E targets of 9.7x and 10.6x (0.8x and 0.5x s.d. below their five-year historical average). The potential upside of c.20% from current levels is driven by both valuation expansion and earnings growth. We expect a revaluation of c.10% for forward P/E ratio, while earnings growth for 2024F should reach c.9%.
Prefer sectors with policy/structural growth tailwinds
We prefer sectors with solid growth prospects, favourable policy support and attractive valuations. We are Overweight on Consumer Discretionary, Communication Services, Information Technology, and Insurance sectors. We upgrade the Information Technology sector due to a pick-up in global tech cycle. We stay Underweight on Healthcare and Diversified Financials. For a list of our high conviction names, please refer to page 7.
