China equities: Comeback on the cards. After three consecutive years of underperformance, we believe a comeback could be on the cards for China equities. The recent performance of key benchmark indices suggests that a rebound is underway; the SHCOMP, HSCEI and Hang Seng are up by 5.2%, 5.4% and 2.3% respectively on a 1m basis (as at 19 Mar). In addition to technical factors such as the sharp discount to global equities, floor level valuations, and light investor positioning, we believe the following will provide additional tailwinds for China equities:
1. Pro-growth measures to combat deflationary pressures. China’s deflationary pressures have held its market back, with the GDP deflator remaining in negative territory for three quarters in a row. The implementation of pro-growth measures is anticipated to restore growth in the GDP deflator, which would help lift investor sentiment. With the market’s low base last year, coupled with gradual domestic consumption recovery, we expect prices to gradually climb out of deflation.
2. Expected recovery in PPI. Previous PPI data moved in tandem with profit growth momentum. As PPI is expected to regain momentum towards 2H24, it should drive earnings revisions across China Equities and support multiple expansions.
3. Share buybacks in Hong Kong and Shanghai supportive of markets. Share buybacks in both Hong Kong and Shanghai exchanges have been taking place at elevated levels. Hong Kong buybacks in particular hit a record high of HKD126bn in 2023, which is approximately five times the average level seen from 2017 – 2021. This signals companies’ confidence in their own prospects and helps to bolster investor sentiment as well as build a floor for stock prices.
Equity fund flows: Significant inflows into US equity funds. The week ended 13 Mar saw record-setting flows into US equity funds; EPFR-tracked US equity funds saw USD56bn in new monies, which is the highest inflow since 1Q21. Flows into leveraged US equity funds also climbed to an 86-week high. AxJ equity funds saw marginal outflows, led by China equity funds, which recorded just its second outflow year-to-date. Europe equity logged its 11th consecutive weekly outflow, with another USD1.7bn redeemed during the week.
Figure 1: Close correlation between PPI and industrial profits
Source: Bloomberg, DBS
Equity Research Highlights
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