In the first half of 2023, investors and analysts were apprehensive about China's economic fundamentals and asset markets. The concerns stemmed from worries about the medium-term cycle adjustment and the prolonged structural problems faced by the country. The pandemic's aftermath and industry restrictions during the initial six months of the year surpassed market expectations, leading to a state of excessive pessimism. Furthermore, there was a sense that the government's policy priorities and sensitivity were not meeting the anticipated proactive response. However, despite the challenges, experts at Hana Securities Research Center are optimistic that the second half of the year will bring about a mid-cycle recovery, correction of pessimism, and gradual easing of the situation.
Positive Signs Ahead
Monetary and Fiscal Support: To counter the economic challenges, China is expected to implement monetary and fiscal policies that will expand and provide support to the economy. Hana Securities predicts that the credit impulse will rebound by the end of the year, bringing much-needed relief. Additionally, fiscal expenditures are projected to grow in the second half of the year, after experiencing flat growth in the first half. Local special bond issuance progress is expected to accelerate in the coming months, bolstering government investment and further supporting economic recovery.
Real Estate Policy: The real estate sector, a significant driver of China's economy, will witness a variety of measures to stimulate demand and purchasing power. The government plans to reduce down payment rates and ease purchase and lending restrictions. These steps are intended to revitalize the real estate market and boost consumer confidence.
Focus on Private Sector: In a noteworthy move, key Chinese ministries have held multiple roundtable discussions with private enterprises since July. The government is actively seeking to resolve uncertainties and establish a more favorable environment for the private sector. This communication effort is aimed at stimulating business investment and fostering employment growth. However, close monitoring will be essential to assess any potential impact on the platform/service sector and the involvement of private companies in government projects.
N-Shaped Recovery Expected
The overall outlook for China's economy in 2023 is characterized by an N-shaped recovery pattern, suggesting sustained growth over time. Hana Securities predicts that the economy will follow a "retaliation-slowdown-normalization" pattern, much like during the initial phase of the pandemic. Notably, the two-year average growth rate, which has a significant impact on stock prices, is expected to rebound from a low of 3.3% in the second quarter to the mid-4% range in the second half of the year. This positive development will be driven by the recovery of policy effects and the cyclical movements of households and businesses.
Recovery in Household Consumption: The recovery in household consumption is expected to be sustained in the coming months. Hana Securities anticipates above-average growth in disposable income and consumption expenditure during Q3 and Q4. Moreover, they predict a rise in household consumption and borrowing intentions and a decrease in savings intentions. The consumption of services and automobiles is also expected to surpass expectations. The September-October peak season for housing transactions, e-commerce, and auto consumption, along with stimulus measures introduced since August, will likely contribute to this positive trend.
Corporate Inventory Cycle Recovery: The corporate inventory adjustment cycle is nearing its end in the third quarter of 2023. The leading indicator, the Producer Price Index (PPI), is expected to rebound modestly from July levels. In response to changes in the first half of the year, Chinese manufacturing took measures such as aggressive production cuts, inventory adjustments, and price reductions. These actions set the stage for a self-sustaining recovery in the second half of the year. Additionally, China's inventory growth rate is near the empirical lower bound of 0%.
Investment Strategy
Hana Securities has formulated an investment strategy that capitalizes on the predicted mid-cycle recovery and decoupling of long-term pessimism. They expect this strategy to manifest in the second half of the year through a sequence of events: "inflation - economy (normalization) - real estate (suppliers - households) - local government." As the Chinese economy enters the N-shaped recovery phase, Hana Securities foresees a rebound in the RMB, long- and short-term interest rate differentials, commodity prices, and stock markets, including Hong Kong and smaller companies.
Sector Strategy: For the third quarter of 2023, Hana Securities recommends favoring Chinese cyclicals, consumer discretionary, and semiconductor beta plays. Their focus will be on industry profit shifting from backwardation (energy/materials) to forwardation (industrials/consumer discretionary). They anticipate price and earnings turnaround for consumer discretionary companies dealing in home appliances, electric vehicles, e-commerce, and travel. Additionally, they recommend investing in cyclicals such as chemicals, refining, and steel due to tight supply conditions. Furthermore, semiconductor and telecom companies present attractive prospects due to localization policies and favorable inventory/export cycles.
Conclusion:
While some internal risks remain, Hana Securities is confident that Chinese asset markets will show reduced sensitivity to external factors. They maintain an overweight position in Greater China equities and continue to hold a positive view of Hong Kong's outperformance relative to the mainland. Hong Kong's more favorable structure, with fewer internal and external risks and a more promising economic/policy recovery path in the second half of 2023, solidifies this stance. With these factors in mind, Hana Securities suggests a 2H18 band of 6,400p-8,730p for the Hang Seng H Index, reflecting their optimistic outlook for China's economic and market performance in the latter half of 2023.
Korea IT Times cannot guarantee the accuracy or completeness of the content of this article, and investors are advised to make final decisions at their own discretion-- Ed.
