Answering investors’ key questions amid turbulent markets
Questions that investors globally are asking…
1. What’s the ‘true’ economic growth now? What’s market pricing in?
Our alternative growth indicators say around 6%. Offshore equities
pricing in 4-5% macro growth and 2% 10Y EPS CAGR ex banks.
2. Will Rmb further depreciate? Good or bad for equities? We expect the
CNY fixing to gradually weaken vs. the USD. Modest impact on EPS,
but risk premium has gone up, pressuring valuations.
3. How big are the capital outflows? Impact on markets? Official
statistics suggest Rmb150bn/80bn in 1Q/2Q, and could be high in Aug.
Correlations btw capital flows and equities have recently risen.
4. Should we expect more monetary easing? How does it change val’n?
We expect more rates cuts as China’ real/policy rates are still high.
Every 0.5% cost of equity reduction should improve valuations by 10%.
5. Reforms, interrupted? Yes, and no. Capital markets reforms may be
delayed, but progress has been made on rates/FX, and SOE blueprint
to be announced soon.
6. What fiscal stimulus measures will the government take? Another big
stimulus package is unlikely but supporting policies are in place, and
projects approval and fiscal spending have accelerated.
7. How has the market selloff impacted aggregate consumption? Mixed
discretionary spending trends, property sales have rebounded. More
nuanced wealth effects than headline numbers would suggest.
8. Where are we in the A-share deleveraging cycle? Flows vs. P/E?
Official leverage has fallen to Rmb1tn (peak: 2.3tn), 2% of total market
cap, in-line with the US. Most OTC leverage positions are cleared. We
estimate every Rmb100bn of inflows would raise P/E points by 0.3.
9. How much has the government bought in the A-share market? We
estimate the “national team” has spent Rmb1.5tn since June, based on
our top-down model.
10. Are 1H results in-line with consensus? What are the noticeable trends?
In-line 1H15 results for H-shares, major divergence between new/old
China. Investment income accounted for 26% of A-share earnings.
11. Are valuations cheap for H and A shares? We believe H-shares are
trading cheap relative to our fundamental expectations, and select
value opportunities are emerging in A shares.
12. ADRs inclusion to MSCI still on? If so, when? And what’s the impact?
The inclusion of 14 ADRs to MSCI is confirmed, and the process will
begin Nov 15. In total, these stocks may see 23 days of net buying.