Bullish on A-Shares, Hong Kong Stocks

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In recent times, the global industrial landscape has entered a phase of profound recalibration, characterized by significant adjustments in the capital markets, offering a unique blend of opportunities and challenges for investorsDuring the mid-year strategy meeting of China Europe Capital, prominent fund manager Luo Jiaming articulated that an optimistic outlook is crucial for understanding the monumental shifts occurring within the global economyHis insights provided a thorough examination of the current domestic and international economic milieu, market valuations, and the forthcoming investment prospects that lie ahead.

From Luo Jiaming’s perspective, integrating both valuation and corporate profitability provides ample reason to believe in the resilience and potential of both the A-share and Hong Kong stock markets

Within this vein, he highlighted several promising investment avenues worth considering: first, upstream assets particularly in sectors like energy, metals, and related manufacturing companies; second, Chinese enterprises expanding internationally, particularly as many domestic manufacturers are planning overseas expansion throughout 2024; third, emerging opportunities stemming from demographic changes, where a sustained increase in demand coupled with a decline in the capital cycle enhances the supply-side structure, creating long-term buying opportunities in sectors such as innovative pharmaceuticals and medical devices; and fourth, continuous focus on technological innovation, especially on hard-tech supply chain companies capable of global reach and internet enterprises that convey cultural values.

The strength of the A-H share market remains evident, with ongoing fundamental recovery

As a trailblazer in the dual-market strategies on A-shares and Hong Kong stocks, Luo Jiaming’s views are closely monitored by investorsHe emphasizes that China’s economic structure has undergone structural changes, which can be observed through metrics such as the recent positive signals highlighted by the Hang Seng Index’s profit forecast dataThe rising share of the manufacturing sector within the GDP context suggests a significant boost in physical consumption growth, surpassing the GDP growth rate and even corporate Return on Equity (ROE) growth, distinctly indicating that structural transformation in the economy is quietly unfolding alongside varying industrial characteristics.

As this transformation deepens, the momentum behind economic recovery is slowly buildingSome high-quality companies have reported a resurgence in profitability since 2024. Notably, in the Hong Kong market, several leading firms are actively enhancing shareholder returns, leading to upward revisions in their earnings per share forecasts

From the other side, the Federal Reserve has concluded its interest rate hike cycle, entering a phase of potential rate cuts later this year, which is expected to bolster valuation levels across global equity marketsConsequently, Luo Jiaming remains optimistic about future market trends in both the Hong Kong and A-share arenas, particularly with respect to the recovery trajectory of quality companies’ profitability.

A crucial point of discussion revolves around the existing low valuation levels, presenting significant recovery potentialAssessing capital flows, Luo Jiaming has noted an inverse correlation between the US dollar index and the Hang Seng Index, where periods of decline in the dollar index often correspond to better performance in the Hong Kong stock marketAs the dollar enters a period of easing, this is likely to encourage capital inflows into emerging markets, projecting a positive signal for Hong Kong’s market.

Luo further articulates that, when contrasting the valuations of major economies' stock markets, both Hong Kong and A-share markets display relatively low valuations, possessing considerable upside potential

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Meanwhile, other emerging markets and some developed markets have valuations nearing their peaks from 2021, while A-share and Hong Kong stocks are approaching their historical lows observed in 2018. Given the difficulty of US Treasury rates reverting to the lows seen in 2020-2021, the pressure from capital outflows from China is expected to diminish, potentially paving the way for a high-low switching behavior.

On a broader note, the phenomenon of public companies opting for concentrated share buybacks carries profound implicationsSuch actions act as a stone cast into the still waters of the market, sending out a robust and positive signal

Historically, significant buyback activities within the Hong Kong market have followed certain patterns, predominantly surfacing after the market has hit relative lows

When market sentiments crater following protracted periods of downturn, the emergence of buyback plans by publicly listed companies stands as a declaration of unwavering confidence in their long-term trajectory

This act of faith is not a mere verbal commitment; it is substantiated by the allocation of real financial resources to purchase their own stockCompany management, based on in-depth analyses of their business structures, industry outlooks, and competitive edges, firmly believes in the sustained growth potential of their company’s prospects, undeterred by the prevailing low market conditions

Such proactive signals considerably influence market dynamicsOn one hand, they serve to enhance market morale; typically, at market lows, investor sentiments dwindle due to fears of further declines or uncertainties regarding future outlooks

The initiation of buybacks by companies can act as a “booster shot,” rejuvenating investor confidence and encouraging them to reassess the value of the market and the companies involved

On the other hand, concentrated stock buybacks provide critical support to stock pricesThe relationship between supply and demand significantly influences stock valuationsWhen a company utilizes its funds to repurchase shares, it effectively reduces the number of shares available in the market, boosting demand while stabilizing supply, consequently nudging stock prices towards either stability or growthMoreover, the positive signals emanating from such buybacks are likely to attract additional investor interest, further increasing demand, thereby fortifying stock prices against potential excessive declines due to market sentiment and ensuring a relatively stable price range, which is essential for healthy market development