DBS: Stimulus policies may drive funds into the mainland and Hong Kong stock markets, bullish on high-yield domestic bank stocks
DBS Bank analyst He Jiaqi stated that recent policy stimuli in the mainland will drive a rebound in both the mainland and Hong Kong stock markets, especially optimistic about high-dividend domestic bank stocks. Although the impact of the policy on earnings has not yet been implemented, fund managers may increase their allocation to Chinese stocks. She expects domestic bank profits to remain stable, with low dividend payout risks, and believes that domestic banks can serve as alternatives to bonds. External factors such as the Fed's interest rate cuts will also affect the market, with gold prices rising due to geopolitical tensions and a weak US dollar, with a target price of $2,835 per ounce
According to the latest information from Zhitong Finance and Economics APP, a series of policies recently announced in the mainland have boosted the rebound of the stock markets in both the mainland and Hong Kong from their lows. Ho Ka Kei, Head of Investment Strategy Team (Wealth Management Department) at DBS North Asia, mentioned that all these policies are unprecedented and are helping to boost market sentiment. Many fund managers had previously reduced their allocation to China, but with the introduction of new policies, a slight shift in fund allocation towards China is already enough to drive the stock market up.
She pointed out that the impact on the earnings of listed companies has not been seen yet since the policies have not been fully implemented. However, many fund managers had reduced their holdings of Chinese stocks for various reasons before the policy changes. With the emergence of new policies, they naturally hope to increase their holdings and even try to increase the allocation to the same weight as before.
In the MSCI Global Index, US stocks account for about 65% by market value, while China only accounts for about 3%. As funds generally increase their holdings of US stocks, any change in fund allocation that shifts some funds from US stocks to China is enough to drive the stock market upwards.
In terms of sectors, Ho Ka Kei is optimistic about the prospects of domestic banks with high dividends. When asked whether policies will affect bank profits and dividends, she expects the industry to have some resilience due to policies. She estimates that the profits of domestic banks will remain stable, with no risks to asset quality and dividends. The average dividend payout ratio of domestic banks is about 33%, so even if they earn a few percentage points less, they still have the ability to pay dividends. She sees domestic banks as an alternative to bonds, with most of the returns coming from dividends rather than stock price appreciation.
On the external front, Ho Ka Kei believes that interest rate cuts are the theme of the fourth quarter. An unexpected 0.5% rate cut by the Federal Reserve could increase the likelihood of an economic soft landing, and she expects the stock market rebound to expand beyond US technology stocks. The bank has designated overweight holdings for US stocks and Asian stocks (excluding Japan) on a 3-month and 12-month basis.
With the recent consecutive record highs in gold prices, she admitted that even though gold prices have risen to high levels, geopolitical factors and a weak US dollar are both supportive of gold prices. Therefore, gold currently accounts for about 6% of the overall allocation. Most central banks do not want to hold too many US dollars, and gold has become another safe-haven asset worth holding. Many central banks are gradually increasing their gold holdings, which is a factor supporting gold prices in the long run. The bank's 12-month target price for gold is $2,835 per ounce