- The balance or risks – both fundamentally and quantitatively speaking – continue to support our bullish biases on Chinese, Hong Kong and Singaporean equities.
- As such, we expect these ideas to continue generating absolute gains and relative outperformance over the intermediate term.
- On absolute tears, it's admittedly tough to run out and buy 'em up here; that said, however, we certainly do support increasing allocations to these asset classes on any pullback(s).
Over the weekend we received more JAN PMI data out of China on the Non-Manufacturing front and we also received Singapore’s JAN Manufacturing PMI data this morning. The indicators all showed sequential strength, which is incrementally supportive of our broader regional #GrowthStabilizing theme – which itself is underpinned by our fundamental call for continued improvement in the Chinese economy.
On the strength of the aforementioned investment theme(s), we’re seeing continued strength across the associated financial market indicators we have liked and continue to like on the long side with respect to the intermediate term.
The MSCI China Consumer Discretionary Index is up +9%, Hong Kong’s Hang Seng Index is up +11.9% and Singapore’s FTSE Straits Times Index is up +4.2% since we turned the corner on each – which was on 12/10, 11/16 and 12/21, respectively. That compares to +7.1%, +10.7% and +3.4% for the MSCI China Index, the MSCI AC Asia Pacific Index and the MSCI AC Asia Pacific Index, respectively, over the associated durations.
We expect these ideas to continue generating absolute gains and relative outperformance over the intermediate term. Our quantitative risk management overlay suggests the same.
We’ll get Hong Kong’s JAN Manufacturing PMI data tonight and China’s JAN Social Financing, Money Supply and Trade Data on Thursday. We expect continued improvements – particularly in all the YoY figures, as the timing of the China’s Lunar New Year celebration is favorable for the JAN ‘13 figures. Specifically, China’s Lunar New Year festivities begin FEB 10 this year vs. JAN 23 in 2012.
For those in search of a deeper discussion on the aforementioned investment ideas and themes, please email us and/or refer to the following research notes:
- CHINA CRAWLS FORWARD, WHICH IS BETTER THAN CRAWLING BACKWARDS (12/10)
- KEY CALLOUTS FROM CHINA’S CENTRAL ECONOMIC WORKS CONFERENCE: EXPECT MORE OF THE SAME (12/17)
- BUYING SINGAPORE ON WEAKNESS (1/15)
- MORE CONFIRMING EVIDENCE FROM CHINER (1/18)
From a top-down factor risk perspective, the key callouts from each of the aforementioned geographies are as follows:
- Legitimately cheap, as the Shanghai Composite’s index P/E multiple has compressed by -6.8 turns over the past 3Y;
- Expensive names outperforming by a factor of ~2x on a 1M basis implies potential for broader market multiple expansion, which is augmented by high-beta and small caps outperforming on that duration as well; and
- China’s still-pancaked yield curve (10Y-2Y Spread at 52bps wide) supports our view for relatively muted upside to official growth figures, while the lack of meaningful adjustment being priced into Chinese rate markets (NTM OIS 16bps higher than Benchmark Household Savings Deposit Rate) supports our view of status quo policy over the intermediate term.
- Hong Kong
- The +48bps 1M expansion in Hong Kong’s 10Y-2Y Spread has augured and should continue to augur very well for Hang Seng financials stocks, which are 53.8% of the index; and
- We take solace in the fact that the index hasn’t gotten ahead of itself from a economic perspective – which equity markets have tended to do with great regularity in the post-crisis era of institutionalized yield chasing. Specifically, the Hang Seng is only +3.3% above where it “should” be based on the economic expectations being priced into the 10Y-2Y Spread, which we consider among the best proxies for growth. We correct for divergences in the relative z-scores to arrive at this nontraditional valuation metric.
- Defensive names are still outperforming across multiple durations (i.e. low debt, low beta, low sales and EPS growth and high dividend yield), suggesting the market doesn’t necessarily think growth is back. In light of our view on Singapore’s growth outlook, there exists an opportunity to reallocate to some of the more cyclical names.
- A great deal of macro-related volatility is likely already priced into Singapore’s equity market, as indicated by the spread between 3M Implied FX Volatility and 3M Historical FX Volatility. We correct for divergences in the relative z-scores to arrive at this nontraditional valuation metric.
The key idiosyncratic policy risks from each of the aforementioned geographies are as follows:
- From here, all eyes should be on the 12th National People’s Congress (likely convening in MAR), where the new Politburo leaders will assume their official roles in the Chinese state government. Moreover, we anticipate they will introduce some much needed practical (i.e. > lip service) reforms designed to aid the structural rebalancing of the Chinese economy, such as broadening social security expenditures and widening VAT reform to more regions and/or industries.
- Hong Kong and Singapore
- The key idiosyncratic catalyst for each country/territory is shared: macroprudential measures designed to reign in speculative activity in the associated property market. Singapore recently unveiled a series of dramatic measures on this front, so we don’t anticipate anything further from the MAS over the intermediate term. The HKMA could, however, roll out additional measures (per Chief Norman Chan’s recent commentary), but we anticipate any new measures will be in-line with previous ones (i.e. mere slaps on the wrists).
All in, the balance or risks – both fundamentally and quantitatively speaking – continue to support our bullish biases on Chinese, Hong Kong and Singaporean equities. On absolute tears, it's admittedly tough to run out and buy 'em up here; that said, however, we do support increasing allocations to these asset classes on any pullback(s).