Cost savers: Mid-stream industrial sectors that could benefit from lower commodity prices and highly leveraged sectors that could benefit from lower financing costs.
Top-line growers: Increasing demand for better quality of life suggests a stronger appetite for healthcare, environmental protection, TMT, and child/senior-related consumption.
Reform beneficiaries: Look for potential beneficiaries from SOE reform, “Go Global”, financial reform and land/Hukou reform, but watch for potential losers from fiscal/tax reform.
MSCI inclusion: Select TMT and consumer discretionary names will benefit at the expense of the largest incumbents including financials, energy and telecom.
Here is a link to the full report.
In many respects the MSCI China Index is similar to the Hang Seng China Enterprises (H-Shares) Index. They certainly have a similar chart pattern and valuations. Mainland listed shares have so far been the primary beneficiaries of the opening up of the Hong Kong Shanghai Stock Connect with overseas investors dominating what has so far been one way traffic.
This has resulted in an arbitrage developing between the mainland and Hong Kong listings of major shares. For example Bank of China’s Hong Kong listing has an Estimated P/E of 5.94 while its Shanghai equivalent is 8.19. It is reasonable to assume that this differential will be alleviated at some point.
The potential entry of mainland shares into the MSCI World indices this year may be contributing to the outperformance of the mainland relative to Hong Kong listings. Generally speaking receiving approval from one of the world’s largest index house, to which large funds benchmark, is a highly positive catalyst for related stock markets.
Taking this into consideration, the negative sentiment expressed by a number of investment banks towards the Chinese market over the last month might be too bearish. After all, this breakout is occurring following years of underperformance and is supported by some of the lowest valuations in the world.