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<Research>CICC: Rate Cut Not Determining Factor for HK Shrs, CN Econ More Important; High Div. Sector May Temporarily Underperform
CICC wrote in a report that Hong Kong stocks have retreated 10% from their highs since mid-to-late May and remained weak, but as previously suggested, the broker is not overly conc...
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<Research>CICC: Rate Cut Not Determining Factor for HK Shrs, CN Econ More Important; High Div. Sector May Temporarily Underperform
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CICC wrote in a report that Hong Kong stocks have retreated 10% from their highs since mid-to-late May and remained weak, but as previously suggested, the broker is not overly concerned about a complete retracement of earlier gains. CICC saw support for HSI around 18,000, while the domestic policy window in July and expectations about the US Fed's rate cut are also predicted to provide support for Hong Kong stocks. This view was reaffirmed in the market trend last week: on Thursday and Friday, Hong Kong stocks rose rapidly under the expectation of US interest rate cut, with a one-day increase of over 2%.

In addition, unlike the still weak trend of A-shares, the strong uptrend of Hong Kong stocks also reaffirmed the broker's recent view that Hong Kong stocks have a comparative advantage over A-shares due to more adequate valuation and exit of foreign capital, as well as better corporate earnings.

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However, CICC believed interest rate cuts are not the determining factor for the performance of Hong Kong stocks, especially after a longer period of time in the interest rate cut cycle. Instead, China's economic fundamentals are more important. Historical experience shown that while Hong Kong stocks usually rebound at the start of a rate cut, the upward momentum fades over time, with the annualised rate of increase falling to 6.3% six months after the rate cut begins. In practice, there have been times when the Hong Kong stock market has typically flattened or even declined in the context of falling US bond rates and rate-cutting cycles, such as during the rapid decline in US bond rates in October last year and during the July-September 2019 Fed rate-cutting cycle.

The broker reckoned that if 10-year US bond rates fall to 3.8-4% (corresponding to 4-5 rate cuts in the coming year), with risk appetite and earnings remaining unchanged, HSI is expected to get to the vicinity of 18,500 to 19,000.

CICC commented that rate cuts could bring a liquidity boost and a recovery at the denominator end, especially in liquidity-sensitive sectors, but on top of that, further upside still hinges on a recovery in China's fundamentals, which in turn depends on a big fiscal push to offset credit contraction in the private sector. The broker also believed that strategic emerging and future industries with high-tech, high-efficiency and high-quality features are expected to be the main focus of future development routes, given the potential main mission for the government to develop New Quality Productive Forces.

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As for asset configuration ideas, under the short-term trading theme of interest rate cuts, CICC believed that a lower discount rate may bring higher flexibility to growth sectors, including semiconductors, automobiles, media and entertainment, software, and biotechnology. On the contrary, high dividend sectors may temporarily underperform, but the broker considered that to be a normal phenomenon, which would not change the overall configuration pattern.

In addition, the recent pullback in high dividend themes has caused concern, but CICC forecasted that the complete end of high dividend needs to be built on up-cycle and core asset inflation, which in turn require a major fiscal push to start the credit cycle in order to do so. The time is still not ripe for such pushes in the broker's view.



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