UBS Equities-China Equity Strategy _US election - Near term downside_ Wan...-111405074

ab6 November 2024Global ResearchChina Equity StrategyUS election - Near term downside Near term downside… though this may present a buying opportunityWith the US presidential election resulting in a Trump victory, we see some downside to China equity market performances in the very near term. We envisage a 3-5% reduction in earnings from a 60% US tariff mainly from lower economic growth while greater policy uncertainty from the US on China (e.g. through tariffs on Chinese companies operating out of Mexico) could result in some de-rating. While the Chinese government has clearly stepped up its efforts to revive the economy, more evidence on the scale and execution of the stimulus are needed - for example, our property analyst remains wary about the sustainability of the property recovery based on the policies announced to-date (see the note on “is the 1.1m units" enough). Meanwhile, onshore investor expectations around domestic stimulus have stepped up materially based on our recent conversations and we believe stimulus expectations are somewhat priced in or the market does not believe that a 60% tariff will be fully implemented with some of the export oriented sectors delivering solid share price performances in recent periods. While we remain positive on the China equity market, we believe a potential pullback of 5% or more could present a more attractive entry point for investors. Trump victory likely to be negative to Chinese equities A Trump victory is likely to be negative for Chinese equities from the following fronts: 1) greater tariffs, 2) lower subsidies under the IRA which would negatively impact the renewable manufacturers, 3) more policy uncertainty against China, and 4) potentially higher US inflation and interest rates which would result in weaker inflows into EM equities in general. Our scenario analysis (presented here) previously estimates a 10-15% downside to our base case scenario under a Red Sweep from a combination of lower earnings and multiple de-rating.Market seemingly pricing in more policy stimulusOur recent conversations with onshore investors suggest a significant pick-up in sentiment as a result of elevated expectations around policy stimulus over the coming quarters. Consensus expectations seemed to be around a RMB6trn local government debt swap program at the upcoming NPC meeting however there is quite a divergence among investors around the additional stimulus. Looking at the share price performances in recent periods, export oriented sectors have also been relatively resilient, suggesting that the market is not fully pricing in a 60% tariff. As such, we see some downside risks to the market in the near term, particularly if there was only a RMB6trn stimulus or if the 60% tariff is affirmed. How to position?We continue to favour a barbell strategy with a lean towards high dividend names and domestic focused stocks which could benefit from greater policy stimulus. For now, we would look to stay away from export ori

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2024-11-18
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