Stay Vigilant Amid Macro Uncertainties
- China’s equity markets rebounded in 2024, driven by domestic policy shifts, but uncertainties in global trade, supply chains, and geopolitical dynamics may affect confidence in 2025.
- BoA add that the strength and scope of the policies announced are yet to seen , and that impact will lag for quarters.
- H-shares and ADRs are vulnerable to financial decoupling, while A-shares are more impacted by trade tensions.
- Strategy: Begin defensively (high yield/value) in early 2025 and add quality beta during corrections or stimulus. A stronger rally is possible in 2H25 if credit growth accelerates.
Market: The Worst of De-rating and Flow-Selling is Over
- The MSCI China Index rose 16% in 2024 after losing nearly 50% over the prior three years.
- Top-performing sectors: IT (+40%), Financials (+38%), Communication (+26%).
- Underperformers: Healthcare (-20%), Real Estate (-11%).
- Forward P/E valuation rose to 10x (below the long-term average of 12x), with EPS growth forecasts of 18%/9% for 2024/2025 facing downside risks.
Macro: Strong Stimulus Needed for a 2026 Recovery
- GDP growth in 2025 is expected to weaken, requiring stimulus measures to drive a recovery in 2026.
- Credit growth must increase from <8% to nearly 9% YoY in 2025. Key expectations include:
- 40-60bp LPR cuts.
- A higher budget deficit (~4%).
- Some RMB depreciation.
- Broader measures are needed to support jobs, consumption, and structural reforms.
Model Portfolio Preferences
- Preferred sectors: Internet (media/online retail), non-bank financials, IT hardware, semiconductors, and shipping (localization theme).
- Downgraded sectors: Liquors, telco, heavy machinery, and healthcare (due to negative earnings revisions).
- Cautious outlook: Coal, real estate, and construction materials.
