Omer regev
08/07/2015
Weathering volatility ahead
- Chinese equities have demonstrated mixed performance since China sped up its rollout of market-stabilization policies and the Greek debt crisis deepened. The offshore markets corrected today, with MSCI China and HSCEI both down by around 3%. The onshore A-share markets diverged, with the Shanghai Composite Index up 2.4% and the Shenzhen Composite Index down 2.7%.
- We view the offshore market, i.e. Hong Kong-listed Chinese equities, as relatively more attractive from a valuation perspective.Banks, insurance and selected healthcare companies appear more appealing relative to other sectors. In our view, the recent market correction offers a good entry point to purchase the shares of companies with strong fundamentals and reasonable valuation. We prefer Bank of China, China Merchants Holdings, Ping An and Tencent. We advise investors to avoid H-share Chinese brokers and in general to exercise caution given the market volatility and the uncertain Greek situation.
- The volatility in the A-share market has had limited impact on the Asia high yield credit market, which is supported by China's accelerated liquidity easing, broader funding channels for corporations and the property market rebound. Moreover, we believe the margin loan loss credit risk is rather limited for the Chinese brokerage sector given its good capitalization and the government's liquidity support. Over the weekend, the Chinese government announced that it will speed up implementation of a series of market stabilization measures aimed at cushioning the downward pressure on onshore A-share markets. Since these markets are dominated by retail investors, who react strongly to market sentiment and newsflow, the effectiveness of the measures will hinge on whether they can restore domestic investor confidence. The market stabilization policies announced over the weekend can be categorized into three groups:
- Providing liquidity: The China Securities Finance Corp will expand its business and play a role in stabilizing the markets, and the People's Bank of China will provide liquidity support.
- Suspending IPOs: The State Council decided to suspend initial public offerings (IPOs), and to return all IPO subscription funds.
- Market stabilization fund: Twenty-one brokers agreed to purchase at least CNY 120bn worth of blue-chip exchange-traded funds (ETFs) by 11 a.m. on 6 July. They also agreed not to cut their discretionary positions if the Shanghai Composite Index stays below 4,500. In addition, the central state-owned investment company, Central Huijin, announced that it has purchased ETFs and would continue to do so.This report has been prepared by UBS AG. Please see important disclaimers and disclosures at the end of the document.These measures should ease investor concerns about a liquidity shortage and calm market sentiment in the near term. The CNY 120bn stabilization fund is quite sizeable within the ETF universe; it represents around twothirds of total assets under management (AUM) of A-share ETFs. However, it represents less than one-10th of the A-share markets' average daily turnover, and its share of A-share market cap would be much lower. The market reform. What other potential policy tools can be implemented? In our view, there are other policy measures that the government can consider, including lowering the stamp duty, intervening more directly via state-owned investment funds / sovereign funds / forex reserves, and mandating share buybacks by state-owned enterprises (SOEs). From a macro perspective, we maintain our forecast that the People's Bank of China will cut interest rates twice more in the coming year, including possibly once in 2H15. It could also adopt another reserve requirement rate cut, especially if FX flows fluctuate sharply. Having said that, we expect the intensity of policy easing to fade later this year as the economy shows more signs of stabilizing.
Wealth effect and consumption haven't felt the heat
As the onshore A-share market continues to correct, many are worrying that consumer sentiment in China will also suffer. However, the A-share index is still 80% higher than it was 12 months ago, so the negative impact from the recent correction is less of a worry for now, in our view. However, if the market continues to weaken, it will become a growing concern. Our channel check over the weekend in Shanghai shows that property sales, at least in the tier one cities, do not seem to have been affected yet.
They continue to benefit from the overall easing cycle and the lessening of house purchase restrictions. Cherry pick the long-term winners, focus on fundamentals Relative to A-shares, the offshore market, i.e. Hong Kong-listed Chinese equities, is more attractive from a valuation perspective. MSCI China is trading at around 10x on a 12-month forward price-to-earnings (P/E) ratio, which is below the historical average even if we strip out the elevated valuation during the previous upcycle in 2007-2009. Valuations of banking, insurance and healthcare sectors appear more appealing than other sectors.
The 3% correction of H-shares on Monday provided a good entry point for investing in some long-term market winners. We continue to like Tencent for its leading position in the Chinese internet market and the potential of WeChat advertising. Bank of China's (BoC) overseas business provides resilient NIM amid the easing cycle. The recent restructuring of BoC's ASEAN business also makes it better positioned to embrace the "One Belt One Road" initiative. Besides its solid execution and operating trends, Ping An Insurance's clear leadership in internet finance is not reflected in its share price, which offers more upside, in our view. We also like China Merchants Holdings for its stable earnings from its port-operating business.
They continue to benefit from the overall easing cycle and the lessening of house purchase restrictions. Cherry pick the long-term winners, focus on fundamentals Relative to A-shares, the offshore market, i.e. Hong Kong-listed Chinese equities, is more attractive from a valuation perspective. MSCI China is trading at around 10x on a 12-month forward price-to-earnings (P/E) ratio, which is below the historical average even if we strip out the elevated valuation during the previous upcycle in 2007-2009. Valuations of banking, insurance and healthcare sectors appear more appealing than other sectors.
The 3% correction of H-shares on Monday provided a good entry point for investing in some long-term market winners. We continue to like Tencent for its leading position in the Chinese internet market and the potential of WeChat advertising. Bank of China's (BoC) overseas business provides resilient NIM amid the easing cycle. The recent restructuring of BoC's ASEAN business also makes it better positioned to embrace the "One Belt One Road" initiative. Besides its solid execution and operating trends, Ping An Insurance's clear leadership in internet finance is not reflected in its share price, which offers more upside, in our view. We also like China Merchants Holdings for its stable earnings from its port-operating business.
The restructuring of its West Shenzhen port asset could be a near-term catalyst, and the company could also benefit as market share shifts away from Hong Kong to West Shenzhen in the long term. On other hand, we would avoid Chinese brokers in this volatile market. We have had a negative view on them since December. We think the sector is not attractive from a risk-reward perspective due to demanding valuations and rising regulatory risk. Moreover, one of the measures the government
announced over the weekend to support A-share market is to ask brokers to perform a national service, i.e. to buy up the market via ETFs and promise not to cut the positions until the market reaches a certain level.
We think this could damage their earnings and balance sheets down the road, and it raises investor concern about potentially being part of the policy tools employed by the government. In any event, we would advise investors to watch the volatility of the Hshare market in the coming weeks as the doings in the onshore Chinese equity market and Greece situation continues to unfold.
We think this could damage their earnings and balance sheets down the road, and it raises investor concern about potentially being part of the policy tools employed by the government. In any event, we would advise investors to watch the volatility of the Hshare market in the coming weeks as the doings in the onshore Chinese equity market and Greece situation continues to unfold.
Impact on bond market has been limited
The volatility in the A-share market has had limited impact on the Asia high yield credit market. The Asia high yield credit spread, measured by the JP Morgan Credit Index, stood at 498bps as of 3 July, 8bps tighter than the level at the beginning of June. That contrasts with the 20% fall of the Shanghai Shenzhen CSI 300 Index during the same period. China's continuous liquidity easing, evidenced by the latest interest rate and banks' required reserve ratio cuts, provides clear support in the bond market. Moreover, following Evergrande's recent tapping of the domestic bond market, Guangzhou R&F and Longfor have become the latest offshore-listed Chinese HY issuers that have been approved to issue up to CNY 6.5bn and CNY 8.0bn of domestic bonds respectively.
The reduced lending rate and broader domestic funding channel will alleviate the general corporate liquidity risk and support the HY sector. Excluding the investment grade names, we estimate that more than half of the 45 China HY property developers have the ability to tap the onshore corporate bond market. In total, those issuers represent more than half of the USD 41.5bn China property HY USD bond space. Meanwhile, the physical property market continued to rebound in June. Reported home sales, by area, in 30 cities rose 4.3% month-on-month and 69.3% year-on-year in June, compared with an increase of 15.5% month-on-month and 34.9% year-on-year in May. June sales rose 84.3% year-on-year in Tier 1 cities, followed by 71.5% in Tier 2 cities and 46.7% in Tier 3 cities.
The reduced lending rate and broader domestic funding channel will alleviate the general corporate liquidity risk and support the HY sector. Excluding the investment grade names, we estimate that more than half of the 45 China HY property developers have the ability to tap the onshore corporate bond market. In total, those issuers represent more than half of the USD 41.5bn China property HY USD bond space. Meanwhile, the physical property market continued to rebound in June. Reported home sales, by area, in 30 cities rose 4.3% month-on-month and 69.3% year-on-year in June, compared with an increase of 15.5% month-on-month and 34.9% year-on-year in May. June sales rose 84.3% year-on-year in Tier 1 cities, followed by 71.5% in Tier 2 cities and 46.7% in Tier 3 cities.
At the same time, the onshore fixed income market has remained calm. AAA-rated corporate bond yields dropped on the margin, and threeyear AA interbank commercial paper yield has fallen below 5% since the beginning of June. The offshore CNH bond market has followed the onshore trend. The non-rated and HY CNH bond yield fell from 5.96% at the start of June to 5.86% on 3 July, reducing the onshore-offshore yield gap below 90 bps from the peak of 219 bps in mid February.
Broker margin loan loss risk is manageable Amid the A-share market rout, margin loan losses could pose a potential credit issue for domestic securities should the equity market downtrend continue unchecked. But we believe the systematic risk for the sector is rather low. The average lending ratio for brokerage firms' margin financing business is 30-40%, so it still offers a decent buffer despite the recent firms have raised substantial equity, which has helped them withstand the market volatility. Take Haitong Securities: the firm raised CNY 24bn of equity through an H-share offering and made a reasonable profit exceeding CNY 8bn last year, which, in an extremely distressed scenario, could offset more than a 20% loss in its lending assets as of the end of 2014. Moreover, the regulators have made it clear that they would allow securities firms to issue bonds and tap into other necessary credit lines.
הנתונים, המידע, הדעות והתחזיות המתפרסמות באתר זה מסופקים כשרות לגולשים. אין לראות בהם המלצה או תחליף לשיקול דעתו העצמאי של הקורא, או הצעה או שיווק השקעות או ייעוץ השקעות ב: קרנות נאמנות, תעודות סל, קופות גמל, קרנות פנסיה, קרנות השתלמות או כל נייר ערך אחר או נדל"ן– בין באופן כללי ובין בהתחשב בנתונים ובצרכים המיוחדים של כל קורא – לרכישה ו/או ביצוע השקעות ו/או פעולות או עסקאות כלשהן. במידע עלולות ליפול טעויות ועשויים לחול בו שינויי שוק ושינויים אחרים. כמו כן עלולות להתגלות סטיות בין התחזיות המובאות בסקירה זו לתוצאות בפועל. לכותב עשוי להיות עניין אישי במאמר זה, לרבות החזקה ו/או ביצוע עסקה עבור עצמו ו/או עבור אחרים בניירות ערך ו/או במוצרים פיננסיים אחרים הנזכרים במסמך זה. הכותב עשוי להימצא בניגוד עניינים. פאנדר אינה מתחייבת להודיע לקוראים בדרך כלשהי על שינויים כאמור, מראש או בדיעבד. פאנדר לא תהיה אחראית בכל צורה שהיא לנזק או הפסד שיגרמו משימוש במאמר/ראיון זה, אם יגרמו, ואינה מתחייבת כי שימוש במידע זה עשוי ליצור רווחים בידי המשתמש.
