Is China considering using up to 2 trillion yuan to support, will it take important steps to save the battered China? This question involves a lot of money flows, as investors try to time China** bottoming out. However, while focusing on this issue, it may be wise to focus on some of the more betable ones.
After a poor performance over the past few years, China** still faces headwinds at the start of 2024. Foreign investors are pulling away and turning their attention to other markets such as Japan and India. Valuations in the Chinese market are already quite low. According to Wind, the China CSI 300 Index is trading at a price-to-earnings ratio of 104 times, compared to the average daily level of 12 over the past 10 years5 times.
Hong Kong's Hang Seng Index is trading at just 8 times the price-to-earnings (P/E) of just 8 times, a wider discount compared to the average of 12 over the past 10 years, according to FactSet7 times. Both of these indicators hovered around half of their 2021 peaks.
In this situation, a piece of good news, or at least potential good news, has ignited hope in the Chinese market. China** is reportedly considering up to 2 trillion yuan in funding to support**, a huge move: Morgan Stanley data shows that this is equivalent to about 8% of Chinese mainland**'s free-float market capitalization. Although this news has not yet been officially confirmed, and it is unclear whether the plan will become a reality, it is enough to boost market sentiment, especially at a time when it is already extremely sluggish.
In order to further boost investor confidence, the People's Bank of China announced a cut in the reserve requirement ratio of banks by 05 percentage points, which further boosted investor morale. The Hang Seng Index has now accumulated 63%。This figure is higher than the CSI 300 index by 18% increase, the latter would more directly benefit from any operation in China.
This is not the first time that China has taken large-scale bailout measures. As early as 2015, China used various state-owned holdings to inject capital into **. Since then, the "national team" has entered the market from time to time, and most recently bought China's exchange-traded (ETF).
Considering China's low valuation, there could be a round in the near term. However, whether this is sustainable ultimately depends on China's willingness to boost the real economy through more fiscal and monetary easing. Looking back at 2015, after the intervention, China continued to bottom out until the following year.
Investors should perhaps focus more on promising sectors, such as electric vehicles and semiconductors, rather than simply buying indices. These two industries already have sufficient development potential, regardless of whether large-scale stimulus policies are adopted. Another strategy is to look for those who have been wrongfully killed.
Take, for example, Changhe, the flagship investment company owned by Hong Kong tycoon Li Ka-shing. In the six months to June last year, about half of the company's revenue came from Europe, across a variety of industries, including ports and telecommunications. Compared to sales in Chinese mainland and Hong Kong, sales from Chinese mainland and Hong Kong accounted for only 14% of the company's total sales in the past six months.
As a result, the economic downturn in Chinese mainland and Hong Kong has had a relatively small impact on the company. According to FactSet, the share price is currently trading at five times earnings and has a dividend yield of 72%。Such Hong Kong stocks may not be a direct target of China's "national team" bailout, but they may still benefit from improved market sentiment.
Moreover, if the rally slows, the selling pressure on these ** may not be as severe as in some mainland China**, where the unwinding of so-called "snowball derivatives" linked to specific index levels has exacerbated the selling pressure. Investors are now desperately in need of good news and hope, justified or not, which is likely to continue to boost in the near term**.
However, continued momentum remains contingent on addressing the intractable issues in China's economy, particularly the property market, which is a drag on consumer confidence. In the long run, whatever steps China** decides to take, finding some resilient investments could deliver significant returns.