CICC: Hong Kong stocks can now be relatively more positive!

After experiencing continuous consolidation since mid-June, overseas Chinese stock markets achieved the largest weekly gain since January 2023 last week, outperforming most global markets. This validates our recent point of view that the significant pullback in US bonds and the Hong Kong stock market is not entirely a bad thing.

After all, leaving some room and flexibility allows us to be prepared even if the market does not meet expectations during the key policy windows in July (US inflation and the Chinese Politburo meeting). And if the results exceed expectations, it can provide a greater rebound.

In addition to the high short-selling turnover and low valuations in the Hong Kong stock market, other important factors driving the strong rebound in the market include the decline in US inflation, better-than-expected domestic financial data, and positive signals from the domestic platform economy. At this point in time, the question that the market is generally concerned about is the sustainability of this rebound. Will it be another flash in the pan like before?

CICC believes that the Hong Kong stock market can now be relatively more positive, with the corresponding expectation range of 18,000-22,000 biased towards the upper middle. This judgment is not solely based on the decline in US inflation and the accompanying decline in US bond yields and the US dollar (on the contrary, we believe that the significant decline in US bonds and the US dollar last week may have been somewhat overdone due to short-covering, and the expectation of a significant interest rate cut in the first quarter of next year also seems overly optimistic).

More importantly, there have been marginal changes in domestic policies. We have always emphasized the need to see effective policies that truly ease credit conditions in order to completely reverse the current pattern of growth and market volatility, and the policy levers lie in the relaxation of central fiscal and real estate-related policies.

The People's Bank of China proposed last Friday to support and encourage the reduction of the agreed points for outstanding mortgage loans (through autonomous changes to contractual agreements or new loan replacements). CICC Bank estimates that if this measure can be widely implemented, it is equivalent to another 15 basis points reduction in the Loan Prime Rate (LPR). Assuming a 70 basis points reduction in the mortgage interest rate, based on a 1 million yuan mortgage loan with equal principal and interest repayment, it is estimated that the monthly payment for borrowers can be reduced by about 400 yuan.

Although a complete transformation of economic growth momentum and market consolidation trends may still require more support from central fiscal and real estate-related policies mentioned earlier, reducing the agreed points for outstanding mortgage loans will at least help borrowing households save money that can be channeled into consumption, especially benefiting the general public and middle-income consumers.

It is recommended to pay attention to the actual implementation effects and other possible policy measures that may be announced around the end of July during the Central Politburo meeting.

Against this backdrop, it is expected to be relatively more positive and focus on sectors that are more sensitive to consumption and growth. However, the overall strategy remains effective, namely: 1) engage in short-term trading, that is, buy on dips when the market is oversold (such as at the current level) and take profits when expectations are relatively sufficient; 2) adopt a structural approach, adhering to a "dumbbell" strategy (high dividend ratio combined with high-quality growth sectors). Meanwhile, with the arrival of the peak period for performance announcements, corporate profitability is also expected to become a focal point of market attention.