China, Hong Kong equities to outperform on monetary easing and trade deal while recession risks set to derail S&P 500 rally, SocGen forecasts

Policy easing, trade deal to bolster profitability, stock prices of under-owned Chinese companies this year, according to Societe Generale

The French bank holds a bearish view on the S&P 500 as it expects a recession in the second and third quarter

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Chinese investors checking on stock prices on electronic board in the hall of a securities brokerage house in Beijing, China on June 19, 2019. Photo: EPA-EFE

Published: 11:29am, 21 Jan 2020Updated: 8:12pm, 21 Jan 2020

China and Hong Kong equities are likely to outperform their US counterparts this year as monetary easing and a truce in US-China trade war underpin corporate earnings growth this year, according to Societe Generale. US stocks are due for a correction as recession sets in, it said.

The Shanghai Composite Index may advance 11 per cent, said Frank Benzimra, head of Asia equity strategy, while the Hang Seng Index is forecast to climb 10 per cent. Both are seen rising faster than the 6 per cent gain predicted for the broader Asian markets, he added.

The French bank earlier this month upgraded its 2020 forecast for China’s gross domestic product growth to 5.9 per cent from 5.8 per cent, following an official report that showed some stability in the second-largest economy last quarter. While growth in 2019 was the slowest since at least 29 years, it came above the psychological 6 per cent marker that helped temper concerns about a deeper slowdown.

SocGen expects the People’s Bank of China to continue with its monetary easing stance, forecasting a 5-basis point cuts in the seven-day reverse repo rate to keep liquidity in abundance. A similar cut in the medium-term loan facility rate, which is linked to commercial banks’ prime lending rates to companies and retail clients, would help grease spending and spur growth, Benzimra said.

In the US, SocGen predicts the S&P 500 Index to fall by 6 per cent this year to end its multi-year bull run. Backing that bearish view is its expectations that the US economy would fall into a recession in the second and third quarter, squeezing profit margins and stalling profit growth.

The S&P 500 has gained 3.1 per cent this year to a new all-time high. Last year, the index surged 28.9 per cent, the most since 2013, and outpacing the gains in Shanghai and Hong Kong barometers.

“There are a number of economic risks in the US” with the country entering its 11th year of economic expansion, Benzimra said. “We believe that companies’ operating margins need to be watched.”