GROW Research - 2022-11-21 -
Hao Hong 洪灝, CFA
- China finetuning “COVID-Zero”; flames of “Dual Circulation” turning blue. The Chinese authority is finetuning “COVID-0”, at a juncture when negative exports growth for the first time in 29 months and negative retail growth are suggesting receding demand both home and abroad. Yet onshore market rebounded strongly - from a similar level last seen at the onset of COVID in Mar 2020. China’s export cycle, an intermediate economic cycle running every seven years, has peaked in Feb 2021, and has translated to slowing accumulation of current account surplus compared with GDP. The export cycle correlates closely with China’s stock market cycle via the liquidity created via its export cycle. Thus, a peaking export cycle argues against a “secular bull market” suggested by consensus.
- Economic cycle near turning point, but arduous property recovery likely. The short cycle as measured by the property investment cycle, however, is nearing its turning point, but still needs a catalyst to initiate a new cycle over the course of next twelve months. There are many similarities between now and early 2014. For instance, both periods saw Fed tightening and Chinese property struggling, and the authority eventually came to the rescue. There are also analogs in the market trajectories in both periods. For instance, the Shanghai Composite struggled in the first few months in 2014. Meanwhile, the US short economic cycle is receding from its peak, but not yet appropriately reflecting the recessionary risks confronting the US economy. Given the intertwining of the US and Chinese economies, US macro volatility will find its way to Chinese markets and onto the world via exchange rate, commodities, stocks, and bonds.
- Shanghai ~3-3,500, Hang Seng ~16-23,000, with bouts of volatility. Easing into Cyclicals/Growth over Defensive/Value. Our base case is that China will reopen gradually with zigzags, its property sector will recover slowly with policy support, and a 2023 US recession. If any of these three uncertainties is better than expected, such as faster reopening, swift property recovery or no US recession, it will add to our base-case payoff. China margin cycle is re-expanding and bodes well for the relative performance of cyclicals and growth over defensive and value. Intuitively, if China reopens and property recovers, cyclical demand should improve. And growth, too. Of course, the risk is China stays a hermit, property continues to ail, and a US recession. Such triple whammies would render a risk scenario similar to what we have been through in 2022 – no need to elaborate further. Even so, the epic volatility in 2022 suggests that we should have seen some of the lowest points in the Shanghai Composite and the Hang Seng Index in the current cycle. It is time to look forward.?
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