Is there an opportunity for Chinese stocks? From “double kill Davis” to “double click Davis”

中国股票机会来了吗？从“戴维斯双杀”到“戴维斯双击”

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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, keep the benchmark interest rate unchanged in the second half of 2023, and cut interest rates rapidly after a definite decline in inflation in 2024. In a situation where the market's expectations for US interest rate hikes are already relatively adequate, interest rates on US long-term bonds and the US dollar exchange rate may have peaked, and the global liquidity environment is generally improving.

On the institutional side, the downturn in the A-share market will not change the two-way expansion trend. The risk of China Securities being delisted has been substantially reduced, and the personal pension system will bring long-term capital to the capital market. In terms of scale, it is estimated that individual pensions in China are expected to exceed trillion dollars within five years.

In terms of risk appetite, the biggest focus of macroeconomic policy in 2023 is to release economic vitality through adjustments to epidemic prevention policies and contractionary policies in other fields, which will greatly increase the risk appetite of market players.

In summary, in terms of specific strategies, we believe that with the release of economic vitality and the increase in market risk appetite, there are considerable opportunities for valuation repair for both A-shares and Hong Kong stocks. Among them, under extreme valuation levels, Hong Kong stocks have benefited from the liberalization of the domestic epidemic, the increase in steady growth policies, and the easing of dollar liquidity. There may be more room for valuation repair than A-shares. Structurally, we are most optimistic about companies that have both short-term recovery elasticity and long-term growth logic, especially companies related to the field of self-reliance and self-improvement in technology. At the same time, there is still plenty of room for in-depth exploration of post-pandemic related topics. This includes not only areas of likely retaliatory consumption after the pandemic, but also possible compensatory investments in certain industries after the pandemic, as well as areas where the industry's supply pattern improved markedly during the pandemic.

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