HK Market Strategy Bi-weekly (Vol.18,2015):China rate cuts led to stronger expectations of global ea

Liquidity is improved by PBoC’s interest rate and RRR cuts. Both rate cuts are expected to release c.RMB600 bn for the banking system to support economic growth and relieve the pressure from deteriorating fundamentals. Under the backdrop of Fed rate hike delay and re-entering the global easing mode, the short-term liquidity is expected to continue improving. Following the ECB’s strong hint on rate cut and QE expansion, the market expects more countries, including JP, AU and EM, to loosen monetary policies further. The improvement of short-term liquidity will continue to support HK market rebound.

    Focus on the 13th 5-Year Plan related themes. The holding of the Fifth Plenary Session is expected to accelerate China’s structural reform. The 13th 5-Year Plan will refine several themes mentioned earlier, such as the SOE reform, the One Belt One Road Strategy, Made in China 2025 and the Jing-Jin-Ji Integration. The relatively slower progress on population policy, informatization, agricultural modernization and environmental protection might see breakthroughs. Structural opportunities might drive the rebound further.

    Macro economy might show recovery signs in 4Q15, driving the rebound into phase 3/4. With the recent monetary easing, holding of the Fifth Plenary Session,the expectedimprovementonmacro economy andRMB joining the SDR, the rebound might step into later phases. Potential risks include: Fed rate hike in mid-Dec, ECB’s QE scale below expectations, diminishing effects from China’s pro-growth policies and otherunexpected black swan events.

    Investment recommendation: We suggest investors maintaining an offensive strategy but beware of the profit booking risk after a continuous rise. Focus on structural opportunities and optimizing of the portfolios. Book profits on the early leading performers. We recommend 1) holding blue chips with low valuations and high betas, including China financials and infrastructure developers; 2) overweighting laggards, mainly telecom and health care; 3) picking beneficiaries from theme opportunities, including TMT, high-end machinery, environmental protection, renewable energy, airline and tourism.