Citigroup sees another 20 per cent upside in Chinese stocks this year on spending stimulus
- Hang Seng Index can deliver another 20 per cent gain this year as policymakers in Beijing step up spending on infrastructure projects
- Citigroup also sees potential for about 10 per cent gain in the CSI 300 Index of onshore stocks, Hong Kong-based strategist Liu says
Infrastructure investments rose by 7.1 per cent in the first six months this year, according to government data, against the US bank’s forecast for a 7.7 per cent annual gain. That will augment measures by the central bank and other authorities to inject more liquidity, lower borrowing costs and ease a credit crunch among property developers.
“As the Chinese economy picks up, that would create more momentum for investors to price in all those positive factors,” Liu Ka-ho, head of investment strategy at its banking unit in Hong Kong, said in a July 11 interview. “We are seeing pro-growth policies, very importantly in the infrastructure investment push.”
The Hang Seng Index could climb to 24,300 points by the end of the year, or about 20 per cent from the closing level on Friday. Liu also forecast the CSI 300 Index of mainland China’s biggest stocks to advance by 9.5 per cent.
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Bets on more stimulus grew after China’s economy expanded by 0.4 per cent last quarter amid Covid-19 fallouts, the slowest since the onset of Covid-19 pandemic in early 2020. Investors are also looking for Beijing to tone down its crackdown on tech companies, tweak its zero-Covid strategy and temper the housing crisis.
To be sure, China’s recovery remains patchy, particularly with property-market risks bubbling from the latest boycott by homeowners on mortgage payments involving delayed or abandoned projects by cash-strapped developers.
“The real headwind for China is the property sector, which is why we are not super bullish,” Aninda Mitra, head of investment strategy at BNY Mellon Investment Management, said during a media webinar on Thursday. “There is also a confidence factor at play.”
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Investors are also looking to China’s twice-a-decade national Congress in the coming months to see replacements of key economic stewards including Premier Li Keqiang, said Mitra. “People are in a bit of a wait and watch mode until that episode is behind us, which is what holds me back from being much more bullish.”
Investors betting on a significant economic rebound in the second half will be disappointed, according to analysts at BCA Research. President Xi Jinping is seeking another five-to-10 years in power, which suggests economic and pandemic policies will be unpredictable. Authorities are unlikely to either abandon their zero-Covid policy or stimulate aggressively to ensure a smooth transition, they added.
BNY Mellon’s investment management arm remains “tactically constructive” on China’s assets, with the market being the “only bright spot” on valuation advantage.
“We expect investments to be the key driver for the recovery in [the second half] as the government front-loads infrastructure spending,” Ho Woei Chen, economist at United Overseas Bank in Singapore, wrote in a Friday note. “Consumption could remain weak.”
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“The timely containment of the mortgage non-payments problem, stronger stimulus measures and more balanced Covid policy would all be necessary to stabilise the outlook,” Ho added. There is room for lower reserve-requirement ratio and mortgage rates, she added.
With all the policy push and with Covid-19 easing, the effectiveness of those policies will start having some effect, Citibank’s Liu added. It could help brighten the earnings outlook.
“With improving credit impulse and economic activity bottoming out, it could translate to better Chinese equity performance,” said Liu, telling clients to be patient on the recovery. “The recent rebound covered 10 to 15 per cent of value loss [from mid-March]. There is still a long way to go.”
