Place your bets on Chinese stocks to beat global peers in the next six months on policy divergence, BCA Research says
- The MSCI China and Hong Kong indices are likely to outperform their global peers in the next six months as monetary policies diverge, BCA strategist says
- Chinese stocks represented by both indices are in oversold territory while a stronger dollar could support returns in local stocks pegged to the US currency
Investors should favour stocks in the MSCI China and MSCI Hong Kong indices over global benchmarks, as a divergence in monetary policies in China and the rest of the world creates room for outperformance, the Montreal-based company said in two new tactical trades on January 19.
“Chinese investible stocks are in oversold territory and are likely to rebound in the near term in both absolute and relative terms” and offer good value, strategist Sima Jing wrote in the report. “The Hong Kong equity index is also technically oversold. Since the composition of the index has become more defensive, it is likely to outperform in risk-off phases.”
Both indices have outperformed their US and global peers in the opening weeks of this year, according to Bloomberg data. The MSCI China Index slipped 0.4 per cent while the Hong Kong index gained 2.9 per cent, damaged by regulatory crackdowns while US and global stocks lost more than 4 per cent.
Last year, they fell by 24 per cent and 6.4 per cent respectively, while the S&P 500 and MSCI World Index rallied for a third year to record highs.
Higher bond yields in the US have ignited a rotation out of US technology stocks this month amid signals from the Federal Reserve suggesting a faster pace of tightening from next year. While Chinese technology stocks could also suffer, losses may be cushioned by policy easing momentum in the Asian economy, Sima added.
“Insurance and diversified financials subsectors are less vulnerable to escalating short-term interest rates compared with property stocks,” said Sima. “The defensive nature of the MSCI Hong Kong Index will support its performance relative to industrial- and tech-heavy emerging markets and global equity indexes.”
Besides, the strength of the US dollar would also have a material impact on Hong Kong stocks, BCA Research said. Tighter US monetary policy and higher bond yields could strengthen the US currency and the pegged Hong Kong dollar, underpinning stock returns.
Deutsche Bank’s private banking unit is taking a neutral stance for now, expecting the second quarter to be the turning point for Chinese equities. Covid-19 restrictions based on its zero-tolerance policy are headwinds to the economy.
Despite some degree of monetary and fiscal policy easing recently, “policy tightening in certain sectors could continue in line with the government’s longer-term objective of common prosperity,” said Jason Liu, Asia head of the chief investment office at Deutsche Bank International Private Bank.
Current policy easing measures are insufficient to revive China’s slowing economy, Sima wrote in the report, even with the central bank cutting its policy loan rates on Monday for the first time in almost two years.