Fourth-quarter corporate earnings rebound, consumer spending recovery, social security pension funds entering the market... Will the Chinese stock market usher in ten potential positives?

HSBC's latest research report pointed out that there are ten potential positive factors in the Chinese stock market, and the stock market still has promising prospects.

HSBC is optimistic about the Chinese market outlook. Firstly, there are signs of recovery in the real estate market, with secondary transaction volumes in major cities rebounding; secondly, with the support of ten positive factors such as consumption stimulus, improved corporate profitability in the fourth quarter, strengthened shareholder returns, and the Fed's interest rate cuts, the Chinese stock market may regain market vitality.

HSBC pointed out that although most are still in the early stages, when viewed collectively, they can have a positive impact on the market. This injects a shot in the arm for the market.

1. Real Estate May Recover

HSBC believes that real estate plays a crucial role in the Chinese economy, especially in boosting confidence and encouraging risk-taking. Although real estate prices have not completely stabilized yet, macroeconomic factors are gradually improving. Developers' financing environment is becoming more relaxed, coupled with policy support from the central government such as guaranteeing pre-sale housing delivery, lowering mortgage rates, and down payment requirements, which help the market recover.

In addition, local governments are also increasing their support to stabilize the real estate industry.

At the same time, the coordination of fiscal and monetary policies is expected to strengthen, and market interest rates and mortgage rates will further decline. Although the number of unsold properties in China is still large, inventory is gradually being digested.

HSBC's real estate team predicts that the recovery of real estate sales will start from the stability of the secondary market and gradually expand to the primary market. Currently, the trading volume in the secondary market of several major cities has shown signs of recovery, which may be an early signal of market stabilization.

Due to the scarcity of market buyers, many owners choose to rent out their properties. The People's Bank of China recently pointed out that China's rental yield may rise to over 3%. Rental yield higher than the mortgage interest rate's holding cost may attract investors back to the market, bringing new vitality to the real estate market.

2. Domestic Consumption Rebound

HSBC believes that the rebound in domestic consumption will be a major factor, with consumer-facing companies accounting for over half of consumption growth.

In addition, policy support, including the old-for-new plan, stimulating service demand, and expanding the social security network, can also stimulate consumption.

According to CCTV News, on August 25th, the Ministry of Commerce and four other departments issued a notice, providing subsidies for consumers who purchase 2nd level or higher energy-efficient or water-efficient standard 8 categories of home appliances, with a subsidy standard of 15% of the final selling price of the product, each consumer can be subsidized for 1 item per category, with each item not exceeding 2000 yuan

3. Industry consolidation can enhance corporate profitability

During industry cycles, consolidation can enhance a company's profitability. When the profitability of an industry is low (usually due to reduced demand or oversupply), some companies may exit the market because they cannot maintain a reasonable return on invested capital (RoIC lower than WACC). At this point, these companies may face bankruptcy or become acquisition targets due to their lower valuations.

HSBC believes that the result of industry consolidation is that market share will gradually concentrate in the hands of a few leading companies, enhancing overall profitability.

For example, in China's home appliance industry, there were originally many companies producing air conditioners and refrigerators, which limited profitability. However, after nearly two decades of consolidation, Gree, Midea, and Haier now hold over 80% of the market share, significantly improving the industry's profitability.

HSBC points out that this situation is occurring in some industries:

◆ The price of electric vehicles is declining, and smaller, less technologically advanced manufacturers are gradually being squeezed out of the market. As of July 2024, the top ten brands occupy 78% of the electric vehicle market.

◆ The online travel agency market is fiercely competitive, led by Ctrip, Meituan, and Tongcheng Tourism. The industry continues to consolidate, with China's online travel penetration rate increasing from 39% in the first quarter of 2019 to 61% in the first quarter of 2023.

◆ Pharmaceutical companies, pharmacies, medical device manufacturers, and hospitals (private sector) are rapidly consolidating.

HSBC points out that many Chinese companies are now actively "going global," seeking new investment opportunities around the world, with the potential to expand their sources of revenue:

BYD is establishing factories in Thailand, Brazil, and Hungary, solar companies are planning to build capacity in the United States, and medical companies are actively investing in Indonesia.

4. Strong recovery in corporate earnings in the fourth quarter

HSBC believes that domestic market confidence is the first step to achieving better market performance. In the first half of the year, mainland China's earnings per share (EPS) increased by 5% year-on-year, mainly contributed by internet companies. Overall, business management is relatively conservative about the outlook for the second half of the year, with the market generally expecting growth to be very moderate.

However, the market generally expects full-year growth to reach 20% in 2024. The realization of this expectation depends on the strong recovery of corporate earnings in the fourth quarter.

5. More dividends and stock buybacks

HSBC believes that companies in mainland China generally hold a large amount of cash. This usually occurs when company investments and capital expenditures are low. Companies can return this cash to shareholders in two ways: by paying dividends or conducting stock buybacks.

Earlier this year, regulatory authorities announced a plan aimed at improving Chinese companies' policies on dividend distribution, stock buybacks, and executive compensation, with the aim of encouraging companies to adopt policies more favorable to shareholder interests and promoting increased shareholder returns HSBC believes that this year, companies have further strengthened their plans to return cash to shareholders:

They have announced plans to repurchase stocks worth over $150 billion, double that of last year. Shareholders have taken notice, preferring companies that return cash to shareholders in a low-growth environment. By 2024, the total cash return rate (dividend yield + repurchase yield) should exceed 5%.

6. Improvement of IPO and Information Disclosure Policies

HSBC points out that new rules and regulations will improve the IPO process and the operation of the secondary market. For example, even if a company withdraws its IPO application, it may still face fines if false information was previously released. In addition, regulatory authorities will ensure that companies release accurate financial statements and will review the auditors and underwriters of IPOs.

At the same time, market manipulation, insider trading, and trading based on undisclosed information will be subject to stricter scrutiny at both the corporate and individual levels. For example, shareholders cannot sell their shares through securities margin loans to bypass the lock-up period after an IPO. These measures aim to enhance market transparency and credibility, improving the overall quality of the market.

7. Deposit Reaches Historic High

HSBC believes that the amount of savings in Chinese households is increasing, and banks hold a large amount of deposits.

Considering the current substantial deposits, even if these cash reserves only flow into the stock market to a small extent, they may still have a significant impact on the local stock market. If households start seeking higher returns and invest their funds in the stock market, the local stock market may receive strong support and growth momentum as a result.

8. Pension Funds Can Allocate More Funds to Stocks

HSBC stated that by the end of 2022, the total assets of the National Social Security Fund (NSSF) managed by the central government will reach 1.8 trillion RMB.

According to regulations, the fund's exposure in the stock market must not exceed 30%. However, the current stock allocation of pension funds is far below this limit, holding only about 119 billion RMB in stocks, accounting for around 7% of its total assets under management (AUM).

Like other insurance and social security funds, the NSSF can increase its holdings of stocks, thereby introducing more capital into the market. This practice can help boost investor sentiment, bring more funds into the stock market, and potentially drive market activity and growth.

9. Fed Rate Cuts Stimulate Liquidity

With the upcoming September FOMC meeting, the market generally expects a rate cut of at least 25 basis points. HSBC believes that a rate cut by the Federal Reserve can benefit the Chinese stock market in two ways:

1. Historically, the decline in US bond yields has been beneficial for Chinese internet stocks and H-shares;

2. The start of a US rate cut cycle could provide more room for the People's Bank of China to implement monetary easing policies.

10. Demand for emerging market stocks may rise, providing support for Asian stock markets

HSBC believes that with the decline in US bond yields, demand for emerging market stocks may rise, providing support for Asian stock markets.

Benefiting from the rebound driven by artificial intelligence, Taiwan and South Korea are the top two performing markets in the region. The growth momentum of the Indian stock market is the strongest, but foreign investors are not very interested due to high stock valuations. In addition, the Japanese stock market is struggling due to the prospect of a stronger yen. Marginally, this makes the Chinese stock market relatively attractive.

It is worth noting that the correlation between the Chinese stock market and global markets is low, which is an advantage for diversifying global investment portfolios.

HSBC points out that the current cash yield of the Chinese stock market exceeds 5%, making it a good choice for value investors and income-seeking investors. At the same time, foreign funds' exposure to the Chinese stock market is close to multi-decade lows. If risk factors in other regions become significant concerns for investors, this could lead to a resurgence of funds into the Chinese market, further boosting the performance of the Chinese stock market