With solid earnings growth, structural improvement to trigger a further re-rating, continuous funds inflow and reasonable valuations, CIMB believes that investors should continue to stay positive on Chinese equities in 2018. Based on CIMB’s index targets, investors can expect to rake in 20 percent returns for the year by simply investing in the MSCI China and Hang Seng Index.

For investors who are looking for greater alpha, there are a few sectors that CIMB recommends being overweight on.

Investors Takeaway: Finding Alpha With These Sectors

1. Bank On The Banks And Insurance Sector

For starters, the banking and insurance sectors are riding on the rising interest rate environment. For large banks and insurance companies, government regulation tightening and deleveraging initiatives will give them opportunities to gain market share from smaller players. Another fundamental factor driving both banks and insurance companies will be the robust earnings growth and structural improvement from lower leverage and lower non-performing loans.

Thanks to higher interest rates, structural improvement and solid earnings growth, CIMB foresees the banking and insurance sector to bring alpha for investors.

CIMB’s Stock Pick: China Life Insurance, China Construction Bank

2. Tech (Hardware) Still A Key Growth Sector

tech hardware

The tech hardware sector is another sector that CIMB is overweight on in 2018. The momentum of handset components is expected to be sustained in 2018, thanks the smartphone specification upgrade trend. Bezel-less design, multi-cameras and miniaturisation are the major trends in the smartphone industry that will drive demand for tech hardware. In addition, Chinese components makers should also benefit from the continuous market share gains of Chinese handset brands like Huawei, Oppo and Xiaomi.

CIMB’s Stock Pick: AAC Technologies, ASM Pacific

3. Airline Sector Flying High

china airport

The airline industry is one which CIMB foresees strong investment value, thanks to tailwinds in the industry. The recent policy to strictly control the number of new routes has effectively created a supply-side reform in the airline industry to benefit large airline players. With potential further liberalisation of ticket prices in certain key cities and steady but robust passenger and cargo volume growth, the airline industry should expect to experience profit growth.

Thus, CIMB upgrades airline industry to overweight on positive policies that will further liberalise air ticket prices and trade recovery.

Sectors To Avoid: Utilities, Capital Goods And Energy Sectors

To achieve alpha, investors also have to cut holdings on underperforming sectors.

With the over-capacity situation in power plants and high coal price situation, CIMB is growing increasingly concern about the utilities sector. CIMB believes that the over-capacity situation could curb the utilisation rate and margins of independent power providers. In the near term, CIMB highlights that the shortage of natural gas during peak season could still be an overhang.

CIMB have also kept capital goods and energy sector at underweight. This is because of the potential deceleration of fixed asset investment and higher financing cost due to rising interest rate. For the energy sector, CIMB cites limited further upside on oil prices and potential higher natural gas segment loss as the factors that will weigh down on energy companies.

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