A look back at 2015-16 market bottoming
- China & HK stocks regained footing on strong market intervention, robust holiday data
- A look back at 2015-16 market rescue suggests capital mkt measures alone cannot guarantee a bottom out
- Mkt to trade range-bound until new catalyst emerges; watch Jan-Feb eco data, details of new stimulus on consumption in March
- Favour oversold consumer stocks, beneficiaries of China’s effort to build modern industrial system, and selected SOEs for March
Regain footing. A step-up in market stabilization efforts as well as robust CNY holiday data triggered long-awaited rebounds in both China and HK after the stock selloff went extreme in late-Jan. However, trading volume is yet to show a significant pick up, and short-selling turnover was still above the three-month average.
A page out of the 2015 playbook. The current market conditions, characterized by significant capital market intervention amid a slowing economy, recall the events of 2015, when China intervened to stabilize a 43% market crash triggered by deleveraging. That market rescue helped halt panic selling for four months in 2H15, but stocks only bottomed out in 1Q16 when a combination of demand-side stimulus, supply-side reforms, and favourable global liquidity environment propelled the economy out of the woods. We anticipate a similar scenario this time around – while capital market interventions can put a floor for stock market in the near term, we await more effective economic policies to do the heavy lifting. Before that happens, we suggest focusing on trading opportunities. Key events/data to watch incl. Two Sessions (details on new stimulus measures), Jan & Feb eco data (especially retail sales), Feb credit data (especially M1), and large companies’ guidance in the result season.
Three themes for March. 1) Should we see more positive signs emerging in the economy, we believe consumption-linked sectors like retailing, durables & apparel, internet and auto have bigger upside after significant derating last year. Some stocks with resilient earnings deserve valuation recovery, and this has already happened on stocks like Li Auto. 2) we also compiled a list of beneficiaries of China’s effort to build modern industrial system, as it will be high on government’s agenda in Two Sessions. And 3) we continue to favour selected SOEs in telco and oil for their stable business and attractive dividend yield. We provide a new screening on other SOE picks. On our top pick, we replace BYDE (285 HK) with AAC Tech (2018 HK) for a tactical trade on upcoming result.
