China and Hong Kong stockmarket outlook 2018


1. The Hong Kong market outperformed global peers in 2017. Do you think the rally can be sustained in 2018?

We believe that the overall investment climate will stay positive in 2018. In 2017, the Hong Kong stockmarket outperformed other Asian markets, with the Hang Seng Index gaining 36% for the whole year. The performance of the Hong Kong stockmarket is closely linked to the health of global financial markets and the Chinese economy.  We believe that investment sentiment will stay positive as global economic growth has re-entered an up-cycle.  On the other hand, the 19th Party Congress has made clear that China’s growth pivot will shift from targeting high growth to achieving quality growth.  We see this as a favorable development for China’s economic restructuring and expect the policy changes to benefit the long-term economic development of the nation.

Corporate earnings growth was the major force behind the rally in Hong Kong stocks over the past year.  In 2018, southbound capital and overseas investors are expected to continue to provide liquidity for Hong Kong stocks.  In addition, the Hong Kong-China Stock Connect programs and ongoing reforms in the Hong Kong stockmarket will help to expand market breadth and depth.  Although the MSCI China Index gained more than 50% in 2017, we are still optimistic about the overall performance of Chinese companies. Therefore, we anticipate that Hong Kong stocks will maintain an upward trend in 2018, with estimated earnings-per-share (EPS) growth of 15.6%1. If the full circulation of H-shares is implemented this year, the Hong Kong market will be able to attract more capital from different sources.

The performance of stocks of different market caps diverged in 2017 with the MSCI China large-cap and mid-cap indices gaining 52.4% and 66.3%, respectively, while the small-cap index increased only 24.6%. The divergence can be explained by the dominance of insurance companies – which generally prefer large-cap financial stocks and high growth companies – in the stream of southbound capital entering Hong Kong.  As it is getting harder to capture alpha in large-cap stocks, we believe smaller-caps will offer higher investment value this year.

2. How do you expect for the A-share market in 2018?

After a period of sluggish performance, the China stockmarket resumed an upward trend in 2017.  However, the market’s laggard performance makes the valuations of China A shares appear more attractive.  Currently, foreign institutional investors’ allocations to China A shares remain subdued and are not in proportion to the market capitalization of A shares in the global market. Foreign institutional investor appetite for China is also inconsistent with the pace of China’s economic growth, which has by far surpassed that of the global economy.  As foreign investors re-examine the A-share market, we expect that the volume of funds flowing into China stocks is set to increase in the future.  At the same time, the internationalization of A shares and the convergence of the behavior of Chinese investors with that of global peers are expected to receive a boost from the Hong Kong-China mutual market access program and MSCI’s inclusion of A shares.

We see three major catalysts for the A-share market in 2018: 1) China’s improving macroeconomic fundamentals will provide support to corporate earnings; 2) Chinese households are gradually shifting their asset allocation away from real estate to other asset classes, which may benefit A shares; 3) new initiatives aimed at deepening reforms and further opening China’s market will continue to enhance investors’ risk appetite.

In terms of investment strategy, large-cap value stocks are still the bright spots. Meanwhile, the valuations of growth stocks have returned to a reasonable level last year and are catching up with the pace of earnings growth.  Therefore, a bottom-up approach is needed to identify stocks with potential.

3. What are the key risks in the market in 2018?

The sustained recovery of the global economy has reduced the fiscal and credit risks of major countries.  However, it also aggravated uncertainties surrounding the monetary policy of major economies.  In China, deleveraging and stricter controls on financial risks have become the focus of economic policy.  Although economic reform is conducive to China’s long-term development, it may also bring downside risks in the short term. Therefore, having a discerning eye for high-quality companies is the key to success in the current investment climate.

4. Have you identified any investment themes in the China and Hong Kong markets?

We have identified three major investment themes in the China and Hong Kong markets:

  1. Beneficiaries of consumption upgrade
    The acceleration of urbanization, the growth of per capita disposable income, and the pursuit of better living standards by Mainland Chinese households have ushered in huge demand for consumption goods. On the back of China’s rising middle class, consumption upgrade will continue to be a major investment theme.
  2. Chinese financials
    Improvements in the macro environment and corporate profitability are driving stable loan growth, which will lead to better asset quality, lower non-performing loans ratios, Net Interest Margin (NIM) enhancement and a more stable capital position for banks. Average NIM has already risen from 2.1% at the end of 2016 to 2.2% in the third quarter of 2017.  It is expected to increase further on favorable global interest rate trends.
    Chinese insurers are valued at 1 times 2017 price to embedded value. The market has priced in limited growth although New Business Value (NBV) is expected to achieve double-digit growth of 11%-20% in the 2018 financial year and 11%-26% in 2019.  Insurers’ blended investment returns have accelerated from 6.2% in 2016 to 6.9% in 2017 and may increase further on the back of rising rates. All these favorable developments are set to buoy sector performance in the short- to medium-term.
  3. Leading technology companies
    Chinese technology has advanced to a level that can accommodate world-class high-tech enterprises.  Meanwhile, China’s online retail market, which is the largest in the world, is growing at a double-digit rate every year. In light of this, the nation’s technology companies are expected to benefit from economies of scale, profit growth, policy support and more diversified business mix.

1. Source: FactSet, I/B/E/S, MSCI, Worldscope, Goldman Sachs Research



The views expressed are the views of Value Partners Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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