View on economic recovery
The outbreak of COVID-19 sent global economic growth deep into negative territory in 2020. Synchronised large-scale fiscal and monetary policies prevented major economies from sliding into perennial recession. According to the IMF, global GDP will contract by 4.4% in 2020 and rebound by 5.2% in 2021, but the pace of recovery will be uneven across countries. We expect the US economy to have a relatively muted start next year, and then followed by a brighter second half, while the Fed’s monetary policy will remain abundantly accommodative throughout the entire 2021.
We stay positive on China’s economic outlook, mainly driven by domestic consumption and manufacturing investment. We expect a rather neutral fiscal and monetary policy stance. A Biden presidency will not fundamentally alter the rivalry between China and the US, but more flexibilities might be given to balance between political and commercial interests. Biden’s coordinated approaches with allies imply that China will face more sophisticated global landscape. This should force China to speed up technological upgrade and independence, and to focus on domestic consumption and the quality and sustainability of economic growth.
View on stock markets
We have been arguing since April that A shares and MSCI China Index should outperform other major markets. We are cautiously positive on their outlook mainly due to overall macro backdrop. However, the rally is expected to moderate; and a number of potential risks could even cause meaningful corrections in near to medium term: 1). strong rally since April has by and large factored in earnings recovery; the current valuations look increasingly stretched. MSCI China Index trades at 16.7x forward P/E vs historical median of 12.5x. The next leg of performance will be driven more by earnings revision instead of further valuation expansion; 2). liquidity inflow could moderate; 3). ADRs face headwinds of potential de-listing from the US market; 4). uncertainties related to Biden’s China policy.
We expect Hang Seng Index, which is a laggard throughout the year, to deliver a better performance in 2021 with a range between 23,500 and 30,500 (equivalent to 11x to 14.5x forward P/E) due to the following reasons: 1). travel restriction will be lifted in post-COVID era so that local economy has better chance to recover; 2). local financial and property sectors take up heavy weights in the index. Pickup of business activities should lead to re-rating of these sectors and local consumer names with suppressed valuations; 3). the secondary listing of ADRs will enhance the weight of new economy stocks in benchmark indices and attract fund inflow; 4). secondary listed stocks might become eligible for southbound trading of Stock Connect; 5). undemanding valuation. HSI trades at 12.8x forward P/E vs historical median of 11.2x.
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