A revival of the China equities rally that saw share prices jump 10% after the Golden Week holiday will hinge on China’s fiscal policy, which remains the key factor to turn around the country’s structural growth outlook, according to Cheuk Wan Fan, CIO Asia at HSBC Global Private Banking and Wealth (HSBC GBPW).
Although Fan (pictured) maintains a neutral position on mainland China and Hong Kong equities, “we regard the latest correction in the mainland China and Hong Kong markets as a short-term technical pullback after the sharp policy-driven rally,” said Fan, in a note released today.
To reflect the benefits of the new capital market support measures, HSBC GPBW has upgraded its end-2024 index targets for the Shanghai Composite Index, CSI 300, and Shenzhen Composite Index to 3,800, 4,700 and 12,000, respectively.
After the rally, the MSCI China, HSI and CSI 300 are trading at 12-month forward price-earnings (P/E) ratios of 11.5x, 9.8x and 14.4x consensus earnings, respectively, “still representing a steep discount to 12-month forward P/E of 21.8x for S&P 500 and 19.6x for MSCI World”.
HBSC GPBW favours “quality Chinese state-owned enterprises paying high dividends, blue chip internet leaders with solid earnings and big valuation discounts to their global peers”.
In Hong Kong, the wealth manager prefers undervalued high dividend stocks in the insurance, telecom, and utilities sectors and select oversold property developers with strong balance sheets.
Fan expects the Chinese government will likely roll out further fiscal stimulus to supplement monetary easing to revive domestic demand and shore up growth, although the CIO noted that the exact timeline of the implementation of fiscal stimulus remains uncertain.
HSBC GBPW’s base case for new fiscal stimulus projects a package of RMB1trn ($141. 569bn), with RMB500bn for direct consumption boost and RMB500bn for key projects in the 14th Five-Year Plan. Fan also expects an additional RMB1trn to be allocated for bank recapitalisation.
