The Chinese equity market has been rallying since the start of 2019 despite China being plagued by concerns of its trade war with US.

With stronger economic data and hopes that a Sino-US trade deal is close to announcement, investors are preparing to flock back into the Chinese market. Moreover, the switch to a dovish stance by the Fed and European Central Bank (ECB) is fuelling hopes that economic and market cycles are a thing of the past.

What Drove The Market To A Market Rally?

Initially, UOBKH expected a market pullback to happen. However, the market pullback did not materialise and ended with a market rally instead. This sudden change in market direction was buoyed by expectations that the Chinese economy had bottomed out. In addition, the central bank “put” is back in play with the ECB restarting its long-term refinancing operation while the Fed signalled an end to rate hikes and quantitative tightening. Following the perceived backstop, the economic and market cycles are a thing of the past.

What Should Investors Expect In 2H19?

Right now, the MSCI China index is trading at 12 times 12-month forward PE. Historically, this implies that the market has been pricing in about 20 percent EPS growth. In other words, investors are expecting further economic and earnings recovery on the back of an expected liquidity flood.

Going forward into 2H19, what should investors be expecting from the market? Comparing past and current cycles, UOBKH notes that the major difference is that the global economy is in a synchronised slowdown and globally facing higher levels of debt saturation. Similar to China, the global economy is facing the problem of debt saturation, which could limit the power of further monetary easing. Hence, investors can expect more polices coming off from the same playbook in further support for key sectors like infrastructure and real estate.

Investors Takeaway: It’s Time For A Strategy Switch By UOBKH

With rekindling of optimism thanks to stronger-than-expected economic data, UOBKH recommends that investors to take on slightly more risk to include laggard plays.

xiabuxiabu

Among the industries, Food & Staples Retailing, Wireless Telecommunication Services, Paper & Forest Products, Independent Power and Renewable Electricity Products, and Healthcare Providers & Services are the top five underperforming industries.

Using a top down strategy, UOBKH recommends Xiabuxiabu, Sunac and Nine Dragon Paper as its top laggard play picks.

Nine Dragon Paper: BUY, TP HK$11.00; Current share price HK$7.23

Xiabuxiabu: BUY, TP HK$16.20; Current share price HK$12.36

Sunac: BUY, TP HK$53.72; Current share price HK$36.45

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