Sentiment was bullish as 2017E earnings recovery has been confirmed by interim results. Moderate gains should be seen in 4Q17 amid bullish estimates. We expect the market to move around 12x12 month forward P/E as further surge of earnings estimates is not likely in the short term. Short-term sentiment could be affected as the Fed has announced balance sheet normalization to be started in Oct and chance of Dec rate hike increased again. We believe there is still downside to the present 12x P/E as potential rebound of DXY and weakening of RMB could affect liquidity in HK. With short-term systematic risks in a slow bull market, mid-term visibility and margin of safety are particularly important. Margin of safety can be considered on: 1) sustainable earnings growth and low Beta, including IT, auto and consumer discretionary counters; and 2) low-valuation blue chips, including Chinese banks and insurers. Traditional sectors with high margin of safety such as utilities and telecom are not the best choices for now as opportunities in bull markets could be missed due to low volatility. Short-term liquidity risks could concentrate on small/mid-caps as investors mainly adopt Buy-and-Hold strategy and allocate to blue chips with higher earnings visibility.
19th CCP Party Congress, revised GDP growth and 3Q earnings quick take
What we are saying to investors: Strong 1H earnings; prefer HSCEI。
Aug data missed consensus. 8M17 FAI growth reached 7.8% YoY, 0.5ppt lower than 7M17. Aug industrial added value growth was 6.0%, 0.4ppt lower than July due to environmental production restriction. Economy growth could moderately decrease amid less government effort on maintaining steady growth, accelerated capacity cut and slower property market. M2 growth should slow moderately as structural reforms and deleveraging are still policy priorities. Monetary policies among developed economies should converge as growth momentum of Europe and Japan is picking up. BoE could raise interest rate next month and ECB could also announce changes in its asset purchase programme in Oct. BoJ is cutting its purchase on government bonds under new policy framework. Therefore, the initiation of balance sheet normalization by the Fed could hardly strengthen the Dollar, but its impact on liquidity in emerging markets needs to be further observed.
At the 19th CCP Party Congress, President Xi gave a speech outlining a planfor China in the long term, without mentioning the 2020growth target as hispredecessor did in the past. 3Q GDP came in at 6.8% yoy in real terms, in linewith expectations. Our Chief China Economist Zhiwei Zhang now expects 6.6%growth in 4Q and 6.8% for the full year. 3Q earnings season has just gottenunderway; 300+ A-shares have announced results, for which earnings grew59% yoy in 3Q, vs. 45% yoy in 2Q on a comparable basis, with cyclical(steel/chemical/paper) being the most robust sectors. We include some of ouranalysts’ 3Q results commentary on page 4and also key earnings upgradesestimate over the past month on page
We expect MSCI China/HSCEI to reach 83/11,900by end-17, driven by furtherearnings upgrades. We recommend overweight internet, financials, consumerservices (education), metals and mining (steel, non-ferrous) and water/IPPs,and underweight telecom, coal, airlines, traditional retailing and staples. Wethink HSCEI may outperform MSCI China in the rest of the year due to our OWpreference in financials.。
HK Market Strategy Bi-weekly:Seeking margin of safety and better positioning。 Based on RSI, telecom, financial and energy sectors weakened last week. Real estate was steady and strong while consumer services and raw materials turned weak from strengths. IT grew strong quickly while consumer goods manufacturing, industrials, utilities and conglomerates have yet to show clear trends. Capital showed net inflows since Sep 1 but diverged in different sectors. Real estate and consumer discretionary had net inflows while IT and energy continued to show much net outflows. As for southbound capital, SH-HK Connect began to have mild net inflow since Sep (vs net outflow in Aug) while SZ-HK Connect remained steady (c.5% of daily buying quota). The percentage of southbound buying on HK stock market turnover also increased.
In 1H17, MSCI China headline growth edged up to 17% yoy from 6% in 2H16.Non-financial growth recovered more noticeably, to 37% in 1H17from theprevious 18%, led by a sharp acceleration in the upstream/downstreamsectors. Midstream earnings saw widened divergence. Reading across A-share2Q17results, we find profitability recovered, capex accelerated, gearing tickedup and restocking continued. Based on the good trend of the high-frequencyindicators we monitor, we expect 3Q earnings growth to be strong.We expect 2017/18E growth of 18.5%/15.1% for MSCI China, driven by betternon-financial sales growth and a recovery in margins and financial earnings.。
Performance and valuations: HSCEI/MXCI/CSI300gained 3.8%/2.5%/2.6%
Performance and valuations: MXCN gained 5%; CSI300added 3.5%。
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