Bahrain Fang Weichang: Multiple positive factors support Hong Kong A-shares, is earnings growth imminent?

According to the Zhitong Finance APP, in October, Fang Weichang, head of the Barings equity team, published an article stating that the Chinese government has introduced targeted policy support measures, coupled with the Federal Reserve entering a rate-cutting cycle, which brings support to the outlook for Hong Kong and A-shares. However, there are still some unclear factors in the local and global markets. For instance, policy penetration will still take time, and corporate fundamentals may face headwinds in the coming months; additionally, geopolitical uncertainties remain, which may lead to sustained market volatility in the short term.

Currently, multiple themes are influencing the outlook for Hong Kong and A-shares. Firstly, the Chinese government seems to have decided to increase policy support, and the market is closely watching how related stimulus measures will impact the economic fundamentals in the coming months. China is currently implementing consistent and targeted economic stimulus measures to boost investor sentiment. Given the current low base and low valuations in the market, there is also hope for supporting future earnings growth.

The Federal Reserve has entered a rate-cutting cycle, which is beneficial for emerging market equities (including China). Other central banks (including the People's Bank of China) can also implement monetary policies to support their domestic economies. Meanwhile, the labor markets in the U.S. and Europe remain robust, which is expected to sustain demand for Chinese export goods.

Overall environment is positive, but risks must be noted

In China, a significant distinction in the current round of policy support is that the stimulus measures are focused on key areas of economic concern, including lowering existing mortgage rates, providing subsidies for replacement demand, and creating swap facilities for securities, funds, and insurance companies to support eligible entities in obtaining liquidity from the central bank through asset pledges, which will enhance institutions' ability to access funds and increase stock holdings. These measures aim to stimulate investment and consumption, which are core issues for revitalizing the Chinese economy. However, given that these policies may take some time to truly penetrate the economic fundamentals, and corporate fundamentals may still face headwinds in the coming months, it is expected that corporate earnings growth may not rebound until next year (2025). Companies that directly benefit from these policies (especially in consumption and real estate) are expected to perform well.

Despite the overall favorable environment, there are also some headwinds. Among the various policies recently introduced by the Chinese government, the most specific measures are primarily focused on addressing liquidity issues through monetary policy. Although the Chinese government has hinted at launching significant fiscal plans to issue special bonds for financing, specific details have yet to be announced; any adverse news may still cause market sentiment to fluctuate. Regarding external factors, geopolitical uncertainties remain, posing risks including the U.S. elections, the EU imposing tariffs on China, and conflicts in Eastern Europe and the Middle East, which may lead to sustained market volatility in the short term. However, given the overall stimulus measures taken by the Chinese government, Barings believes that if the stock market pulls back in the short term, it presents a good opportunity to reassess and buy into Hong Kong and A-shares.

Valuations remain attractive

As the economy gradually normalizes, Barings is looking for attractive valuations and strong structural growth opportunities from a "bottom-up" perspective, which are expected to perform well in the coming months. Structural trends such as perpetual growth, supply chain self-sufficiency, technological innovation, and environmental awareness will continue to emerge. This will benefit industries related to new infrastructure, domestic consumption, healthcare, technology localization, and sustainable development