State Street says China’s move to manage yuan will lift old economy stocks

State Street expects Hang Seng Index to go past its all-time high when inflows from the mainland through the stock connect programmes reach 10 per cent of Hong Kong’s total market turnover from about 7.5 per cent now

PUBLISHED : Thursday, 11 January, 2018, 8:00am
UPDATED : Thursday, 11 January, 2018, 8:17am

China’s old economy stocks are likely to get a boost from the central bank’s decision to adjust its currency setting mechanism, as a slight depreciation in the yuan will stimulate exports and growth, according to State Street.

The move by the People’s Bank of China to remove the “counter-cyclical factor” from the formula used to calculate the daily central parity of the yuan’s exchange rate against the US dollar suggests it was aimed at curbing recent sharp appreciation in the currency.

China’s central bank eases exchange rate setting mechanism

The counter-cyclical factor was initially introduced in May to lessen the effect of market forces on the price setting of the reference rate amid depreciation pressure on the yuan and capital outflows.

“It makes sense for them to remove the cyclical factor now, which should benefit the economy in the second half of the year,” said Ben Luk Ting-wai, global macro strategist at State Street. “Old economy stocks should outperform new economy sector this year.”

The yuan slid the most in more than two months on Tuesday after the removal of the counter-cyclical factor from the reference rate formula. The yuan retraced some of the decline on Wednesday to 6.5256 against the dollar.

Luk said old economy sectors such as insurance, banks, financials, energy and materials were cheap when compared to technology, health care and consumer stocks. Financials and insurance, which are considered value stocks, were likely to be also boosted by higher interest rates.

Meanwhile, rising global oil demand has been positive for oil prices, driving energy and materials companies, which were the cheapest sectors. They were likely to be the biggest contributors to this year’s earnings growth, he said.

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Hong Kong’s benchmark Hang Seng Index is likely to break its decade-old record of 31,958 set in October 2007, when the proportion of inflows from the mainland through the southbound stock connect programmes reach 10 per cent of Hong Kong’s total market turnover, compared to current levels of about 7.5 per cent, Luk said.

The Hang Seng Index edged up 0.2 per cent to 31,073.72 on Wednesday.

Luk forecasts China’s earnings per share growth at 14.8 per cent in 2018, compared to the average earnings per share growth of 13 per cent of emerging markets.