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Just this past 2022, China's capital market suffered a rare “double death from Davis” under the multiple shocks of the Russian-Ukrainian war, the second outbreak of the epidemic, and the Fed's interest rate hike exceeding expectations. Looking ahead to 2023, we believe that the A-share and Hong Kong stock markets may have formed a mid-term bottom for the next 2-3 years. Although the market may still have twists and turns in the short term, a new round of mid-level markets is brewing, and the market may usher in a “Davis double click” where valuation expectations and profits expand together.
We still make this judgment based on the “Chongyang Four Factor Framework” of profit, interest rate, system, and risk appetite.
In terms of profit, we judge that in 2023, along with the adjustment and optimization of domestic epidemic prevention and control policies, the certainty of virus mutation is expected to be transformed into certainty in the economic environment, and the confidence of market players will recover significantly. The credit contraction on both the supply and demand sides of real estate is nearing its end. 2023 will be a turning point for the Chinese economy. The GDP growth rate will begin to recover in the second quarter. The annual growth rate is expected to reach more than 5%, corresponding to a 5-10% increase in the net profit of A-share listed companies.
In terms of interest rates, the central government's stance on the 2023 monetary policy is “precise and strong”, which means that direct credit instruments will still be the policy's first option. Aggregate downgrades, especially interest rate cuts, may be more restrained, and domestic risk-free interest rates are likely to maintain a volatile pattern. The Federal Reserve is likely to remain hawkish in communication in 2023 and maintain its base in the second half of 2023...