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 investors. During 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 economy. His 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 investors. He 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 data. The 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 building. Some 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 markets. Consequently, 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 potential. Assessing 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 market. As 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. 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 implications. Such 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 stock. Company 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 dynamics. On 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 prices. The relationship between supply and demand significantly influences stock valuations. When 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 growth. Moreover, 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.

Ultimately, the strategy of concentrated stock repurchases fulfills a pivotal role within the market, acting as a stabilizing mechanism and a cornerstone for boosting investor confidence. The positive signals released through such corporate actions merit close attention and thorough analysis from investors.