HSBC Stays Neutral China, Hong Kong Equities After Stimulus Package

Editorial Staff

15 October 2024

HSBC’s private banking and wealth arm is sticking to a neutral stance on mainland China and Hong Kong equities, preferring to wait for more concrete proof that the economy and corporate earnings are improving.

Government stimulus measures were unveiled on 24 September, and with new steps also announced at the start of October. Authorities are trying to revive flagging Chinese economic growth and handle worries about sectors such as its debt-laden property market.

Equity markets in China and Hong Kong have risen since the September announcement. The MSCI China Index of equities shows total returns from early January to 10 October of 29.4 per cent. Over three years, it is down 6.11 per cent. (Returns combine capital growth plus reinvested dividends and are given in dollars.)

“Following China’s announcement of the press conference with Finance Minister Lan Fo’an who will introduce moves to `strengthen the counter-cyclical adjustment of fiscal policy’ on 12 October, we expect the government will likely roll out further fiscal stimulus to supplement monetary easing to revive domestic demand and shore up growth,” Cheuk Wan Fan, chief investment officer, Asia, Global Private Banking and Wealth, , said in a note late last week.

The CIO said HSBC’s base case for new fiscal stimulus projects a package of RMB1 trillion ($141 billion), with RMB500 billion for direct consumption boost and RMB500 billion for key projects in the 14th Five-Year Plan. "We also expect an additional RMB1 trillion to be allocated for bank recapitalisation. However, the exact timeline of the implementation of fiscal stimulus remains uncertain,” the CIO said.

Neutral
“We maintain our neutral position on mainland China and Hong Kong equities as we look for more evidence of a meaningful improvement in the fundamental outlook of the Chinese economy and corporate earnings. We believe extension of the China rally will hinge on the fiscal policy which remains the key factor to turnaround China’s structural growth outlook,” Cheuk Wan Fan said.

The CIO noted that after stocks ralled, the MSCI China, HSI and CSI 300 are now trading at 12-month forward price/earnings ratios of 11.5 times earnings, 9.8 per cent and 14.4 times consensus earnings. These valuations are still at a steep discount to 12-month forward P/E of 21.8 x for S&P 500 and 19.6 x for MSCI World.

“We favour quality Chinese SOEs paying high dividends, blue chip internet leaders with solid earnings and big valuation discounts to their global peers. In Hong Kong, we favour undervalued high dividend stocks in the insurance, telecom, and utilities sectors and select oversold property developers with strong balance sheets,” Cheuk Wan Fan said.

HSBC has hiked its end-2024 index targets for the Shanghai Composite Index, CSI 300, and Shenzhen Composite Index to 3,800, 4,700 and 12,000, respectively, in response to the measures by Beijing to boost the economy.

A “lower-for-longer” interest rate situation will persist, which supports investment-grade Chinese bonds, Cheuk Wan Fan said.

“We stay neutral on Chinese local currency bonds and hard currency bonds,” Cheuk Wan Fan said.