Hong Kong stocks: what money managers at BNP Paribas, Haitong and Schroders say about recent market actions

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Hong Kong’s stock market is leaving behind a choppy first week of the new year. As China’s securities watchdog on Friday vowed to ensure stability, investors have regained confidence amid cheap valuations to send the tech benchmark to its best run in a month.

Whether the regulatory traumas that have rocked stocks in recent months will persist in the new year remains to be seen. Many expect the authorities to turn pro-growth to avoid deepening a painful economic slowdown.

Here is a compilation of asset managers’ comments, gathered last week, of where Hong Kong’s markets will go this year and how they viewed recent corporate and industry developments.

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BNP Paribas Asset Management: reforms even in bad times

Last year made clear Beijing’s shift in gears to pursue quality over quantity in terms of growth. But it came at an economic cost. Growth slowed to 4.9 per cent in the third quarter, compared with 7.9 per cent in the previous quarter.

Policy tightening in the property sector has led to defaults, most notably by China Evergrande Group. The embattled giant suspended trading last week after it was ordered to demolish dozens of apartment buildings.

“Beijing finally gave in to the economic stress and announced a policy shift to a pro-growth stance last December, shelving temporarily its deleveraging and structural reform initiatives,” senior market strategist Chi Lo said in a report published on Friday. His firm manages €502 billion (US$569 billion) in assets.

That could mean an upswing in China’s growth this year, as policies like the ones aimed at “common prosperity” are implemented less aggressively than before, he said.

China tech crackdown: after a trillion-dollar rout, has the stock market drubbing gone too far?

But the key market risk for the rest of the year is still regulatory tightening. Since China reined in the shadow bank market in 2017, authorities have retreated from guaranteeing bailouts, added Lo.

“China will stick with its structural reforms even in bad times. Beijing does not want to return to the old debt-financed growth model,” he said.

Haitong International Asset Management: no need for pessimism

The erasure of about US$230 billion of market value from Hong Kong’s market last year has left many investors crestfallen. But there is “no need to be overly pessimistic about Hong Kong stocks”, as they are due for a catch-up by the second half of the year, said Hyde Chen, managing director and head of investment strategy at Haitong International Asset Management in Hong Kong.

“Markets are generally forward-looking, anticipating economic growth by three to six months. If we see the economy slowing in the first half of this year, that would mean that markets are close to the bottom,” said Chen in a media briefing on Thursday.

In the short term, Chen favours onshore equities because of their reduced exposure to regulations.

“But once the dust settles on regulations, Hong Kong’s market has a good chance of recovery and delivering gains in the second half of the year,” he added.

Soochow Securities: markets bottoming

Hong Kong’s stocks deserve more optimism, said brokerage firm Soochow Securities (HK) in a report published last Monday.

“The sentiment surrounding Hong Kong’s markets has been pessimistic. Some are of the view that it is natural for Hong Kong stocks to hit their lowest values,” said analyst Kelly Li in the report.

“However, markets are near the bottom and that is worth being more optimistic about.”

The firm is bullish on Hong Kong stocks that have reasonable dividend yields, citing a few main themes to invest in. Renewables and digitalisation will remain major sectors this year. Stocks that tend to be carried by national pride will also flourish, while the industries hit hardest by the Covid-19 pandemic including hotels, aviation and tourism, could see a recovery.

More companies are expected to expand abroad as domestic demand hits a ceiling, particularly those in household appliances, hardware, cars and high-end manufacturing.

Schroders: difficult year for Chinese internet sector

The Chinese internet industry is in for further regulation and tough competition this year, and that has global investment manager Schroders in cautious mood.

“The new regulations governing the internet sector are uncertain. We do not know how they will be implemented and this uncertainty is likely to hold share prices back,” said Schroders in a note on Friday, led by its head of Asian ex-japan equity investments, Toby Hudson. The firm manages US$967.5 billion of assets.

China tightened control on algorithms used by Big Tech last week, while separately revising rules for app providers on adhering to online security and privacy.

Tech giants are also poised to face stiffer domestic competition in key growth segments, particularly e-commerce, content and cloud, said Hudson.

“2022 will be a difficult year for China’s internet sector in terms of profitability. This will come at a time when the economy is slowing and costs such as workers’ wages and insurance are rising,” he said.

Blue Lotus Capital: tough quarters ahead for Tencent

The first week of local trading saw Tencent hogging the limelight with its divestment moves. Amid fears that tech giants face pressure to shed their monopolistic power, two analysts maintain their sell rating on the WeChat operator.

“Tencent is going to have several tough quarters coming,” said Shawn Yang Zi-xiao, managing director of boutique investment bank Blue Lotus Capital. He remains one of two bears among 70 recommendations, having cut from “hold” last October.

“We still have a sell rating for Tencent. Our target price is very similar to [last week’s] share price,” said Yang. “Outlook wise, Tencent is still performing slightly better than expected for gaming. But for online ads we see a lot of increasing negative factors.”

Tencent slumped 19.5 per cent last year and last traded at HK$443 on Friday. Its sale of a stake in Singapore-based e-commerce giant Sea Limited spooked investors and led to an almost US$97 billion sell-off in tech stocks earlier last week before a belated recovery.

“They are probably going to sell more of their stakes in other companies to be more aligned with compliance [guidelines]. Next could be Pinduoduo or Meituan,” said Yang.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2022 South China Morning Post Publishers Ltd. All rights reserved.

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