Citigroup predicts 16 per cent upside in Hang Seng Index as corporate earnings, China vaccine progress revive market confidence

  • Hang Seng Index could climb by 16 per cent from current levels in the second half as policy stimulus aids earnings recovery, better vaccines ease lockdown risks
  • Stocks have regained footing since sliding to a six-year low on March 15 on bets the worst of crackdown, lockdowns are past

Hong Kong’s blue-chip stocks could climb by as much as 16 per cent in the second half this year on stronger corporate earnings while new vaccine developments temper Covid-19 lockdown risks, according to Citigroup.

The US bank forecasts the Hang Seng Index to reach 24,300 points, with much of the bad news on global inflation and interest rates already in the price, China equity strategist Pierre Lau said. Concerns about the US Federal Reserve’s lift-off could peak around three-quarters of the rate-tightening cycle, he added.

The city’s benchmark slipped 2.6 per cent to 21,008.34 on Wednesday, halting a three-day winning run. It has clawed back 15 per cent or more than US$500 billion of value since succumbing to a six-year low on March 15, according to Bloomberg data. Reports of an end to Beijing’s crackdown on the tech sector have helped Alibaba Group Holding, Tencent Holdings and Meituan soar 24 to 81 per cent from that slump.

Mainland Chinese companies, which dominate the benchmark and the broader Hong Kong stock market, are likely to chart higher profit as Beijing stepped in to shore up the economy and business confidence after weak manufacturing and consumption reports in April, he said.

“In terms of economic growth and earnings, the second quarter is the trough,” Lau said in an interview. “The downside from current earnings per share growth might not be so much, as expectations are already quite low,” having been scaled back to 1.3 per cent from 9.1 per cent in December, he added.

China’s economy took a hit this quarter after Covid-19 lockdowns in Shanghai and 40-odd cities across the country, shuttering factories and upending logistics and supply chains. As a result, banks including Standard Chartered and Goldman Sachs trimmed their second-quarter growth forecasts, with the latter cutting to 1.5 per cent year on year from 4 per cent.

Others including Deutsche Bank and Bank of America are raising the spectre of a recession amid severe economic risks, while the World Bank said it would be hard to avoid recession for many countries. The view gained traction after the Fed raised its key rate by 75 basis points on June 15, the most aggressive policy tightening since 1994, to add to two earlier increases in the lift-off this year.

“Based on the last three rounds of interest-rate hikes, the Hang Seng Index troughed at a relatively early stage of the cycle, at 15 to 17 per cent,” Lau said. “The index should have already troughed, or at the trough level right now. We expect it to rise afterwards.”

Citigroup forecasts the Fed to raise its key rate to a range of 3.5 per cent to 3.75 per cent by 2023, from the current range of 1.5 per cent to 1.75 per cent. A recession in the US and Europe could shave China’s GDP growth by 0.5 to 1 percentage point due to a knock on exports, according to Goldman analysts.

While the domestic markets could possibly absorb the shock better given China’s policy-easing bias, domestic stocks are not immune to the spillover effects of rising Fed rates and recession risks, according to Lombard Odier.

“There will always be a degree of correlation between markets,” said Lee Homin, Asia macro strategist at the Swiss money manager. “If there’s a massive repricing outside the country, that could potentially spill over to the Chinese market.”

“We are constructive on the Chinese market with the average path we expect for the economy being that of a recovery,” said Lee, who expects high single digits returns from the MSCI China Index by the year-end.

Alongside policy easing, China has doubled down on economic support measures, including tax cuts and subsidies, reiterating its pro-business stance while also seeking to bring regulatory tightening to a conclusion, according to UK asset manager abrdn.

“With lockdowns coming to an end, we can expect a spring-back in consumer sentiment and spending,” said Elizabeth Kwik, investment director for Asian equities. “We remain constructive on the outlook for the second half of 2022 as stimuli start to work through the system.”

Citigroup’s Lau said China’s reopening plans for Covid-affected cities could improve after the Communist Party’s Congress, likely to be held in October or November, depending on the availability of vaccines with higher efficacy.

At present, China’s most advanced mRNA candidate is called the AWcorna vaccine, co-developed by Walvax Biotechnology, Suzhou Abogen Biosciences and the Chinese military. It remains in the final stage of clinical trials, while Beijing has yet to approve any foreign mRNA vaccine including Pfizer-BioNTech’s.

“[In the second half], we do expect some cross-border travel, such as going to Macau, but international air travel will still be quite restricted,” he said.

Author: Cheryl Heng, SCMP

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