The Hang Seng Index rallied 1.8% on 16 January, surpassing its 2007 pre-financial crisis peak to hit an all-time high. Onshore-listed Chinese shares have kept pace too, with the CSI 300 index at a 30-month peak. Investor optimism for China may seem at odds with policymakers’ continuing efforts to constrain leverage and speculation of pending US trade tariffs.
But we see several reasons the Chinese equity rally can continue this year:
- Stable macro conditions. Policy continuity, with economic reform supporting an orderly growth deceleration (from 6.8% last year to 6.4% this year in our view), is likely to provide a benign environment for equity investors. Total social financing growth eased to 12.0% y/y in December (from 12.5% in Nov), suggesting progress is being made in slowing credit growth. Yet central bank money market operations have shown that liquidity is not constrained.
- Earnings growth. Synchronized global growth and solid domestic consumption will continue to drive earnings upgrades and growth next year. We see offshore-listed Chinese companies’ earnings growth moderating this year while still achieving an impressive mid-teen percentage expansion and broadening across a wider range of sectors.
- Valuations. Even after a 25% rise in offshore multiples last year, the current 13.3x price/earnings ratio is around 20% cheaper than global peers. A-share multiples have scope to rise on increased institutional and foreign positioning.
So we remain upbeat on onshore and offshore markets alike, and maintain our preference for offshore Chinese stocks within our Asia tactical asset allocation.
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