Asia Strategy Liquidity continues to fuel rally; HSI to trend up Liquidity continues to fuel rally The S&P closed up 4.8% last week despite headlines dominated by nationwide protests sparked by George Floyd’s death and continued US-China tensions. Indeed, t he market appears to have focused on the more positive news of post-lockdown economic reopenings. In Asia, we saw markets rally, with the HSI up 7.8 % and emerging market currencies strengthening against the dollar (e.g., IDR +5.0% and MYR +1.8%). Strategy Report Several potentially risky events ignored by the market in Hong Kong June 8, 2020 Worries over protests in Hong Kong emerged after the passing of the national security law in Beijing on 28 May, but they seem to have faded relatively quickly from investors’ minds. Thousands came together to mark the anniversary of Tiananmen on 4 June, but the gatherings were largely peaceful. In addition, although President Donald Trump Mirae Asset Securities ( HK) Ltd. stated that his administration would take steps to revoke the special treatment of Hong Kong, few details were announced. The US did impose tighter visa requirements Joe Liew on mainland Chinese, but we were relieved that trade discussions were not rolled +852 -2514 -1336 back. All in all, the stock market has done well in the face of these uncertainties. [email protected] Global economic growth troughed in 2Q We continue to believe that 2Q will mark the trough of economic growth for most Mirae Asset Daewoo Co., Ltd. parts of the world. This will be particularly evident in Asia, as China is already on the road to recovery (with the turnaround likely to accelerate in 3Q). Despite early signs of Jay (Jaeil) Lee a pickup in new infections in Korea and China, lockdowns and other strict measures +822 -3774 -1388 have not been reinstated. More and more industries/businesses will start to open, and [email protected] investors will increasingly focus on recovery plays. With interest rates and fixed income returns being so low, we expect funds to flow into equities across Asia. We expect this year’s worst performing markets (Indonesia and India) to resume their upward trends. Interest in HSI to remain elevated as liquidity looks for a home We expect the HSI to experience short-term volatility but remain on the uptrend . Continued recoveries in earnings and sentiment should be key catalysts. Notably, t he tech sector will continue to gain attention on the back of Hang Seng Indexes’ move to allow companies with weighted voting rights and primary listings outside of Hong Kong into the HSI and HSCEI. This development is an added incentive for tech stocks currently listed only in the US to seek secondary listings in Hong Kong. For example, NetEase just priced its offering over the weekend, and JD.com is on the same path. Other tech names that could seek Hong Kong listings include Pinduoduo, Baidu, Trip.com, Vipshop Holdings, Autohome, and Weibo. Hong Kong listings would allow a wider range of participants to buy these stocks. So far this year, we have seen southbound HKex flows buy Hong Kong stocks at elevated levels. YTD, net buying has reached a lofty RMB54bn—one of the highest levels since the start of the HKEx–China connect—as valuations in Hong Kong are lower than those in China. Listings by tech companies with a heavy Chinese presence should continue supporting these flows. Meanwhile, the stability of the HKD peg should be attractive to investors. Paul Chan, the financial secretary of the HKSAR, has been quoted as saying that, with the support of the mainland, the HKD peg to the US dollar will be defended. Key risks include the following: 1) China–US trade tensions could intensify. 2) Further COVID-19 outbreaks could force retreats from lockdown-easing plans. 3) A period of consolidation in the US would not be unreasonable given the strong recovery of the S&P; this could dampen sentiment on the Hong Kong stock market. HSI still down 15% from its pre-pandemic high (x) 40,000 HSI (L) HSI P/E (R) 20 30,000 15 20,000 10 10,000 5 0 0 15-06 16-06 17-06 18-06 19-06 Source: Bloomberg June 8, 2020 Asia Strategy Southbound buying On 18 May 2020, Hang Seng Indexes announced that it would allow companies with weighted voting rights and primary listings outside of Hong Kong to be added to the HSI and HSCEI, effective August 2020. This move will allow for the inclusion of large tech companies like Xiaomi and Alibaba, which means that the tech sector should continue to garner considerable investor focus. This year, we have seen considerable buying in Hong Kong by China-based investors via the HKex stock connect program. We expect domestic Chinese funds to continue to buy given that valuations of Hong Kong-listed stocks are lower than those of China-listed names. The Hong Kong-China stock connect shows net buying of RMB54bn YTD. Table 1. HSI weights should skew more towards tech from August 2020 Stock Symbol Index weight (%) Price (HKD) HSI HSI -HKX 100.00 23,732.520 Tencent Holdings Ltd. 700 -HK 12.06 429.000 AIA Group Limited 1299 -HK 9.70 66.100 China Construction Bank Corporation Class H 939 -HK 8.68 6.290 HSBC Holdings Plc 5-HK 7.72 36.600 Ping An Insurance (Group) Company of China, Ltd. Class H 2318 -HK 5.88 77.400 Industrial and Commercial Bank of China Limited Class H 1398 -HK 4.80 5.100 China Mobile Limited 941 -HK 4.35 55.500 Hong Kong Exchanges & Clearing Ltd. 388 -HK 4.32 282.800 Bank of China Limited Class H 3988 -HK 2.92 2.880 CNOOC Limited 883 -HK 2.06 9.030 CLP Holdings Limited 2-HK 1.89 78.250 Hong Kong & China Gas Co. Ltd. 3-HK 1.73 13.380 CK Hutchison Holdings Ltd 1-HK 1.68 48.700 Link Real Estate Investment Trust 823 -HK 1.63 61.300 Galaxy Entertainment Group Limited 27 -HK 1.51 54.700 CK Asset Holdings Limited 1113 -HK 1.43 43.450 China Life Insurance Co. Ltd. Class H 2628 -HK 1.42 14.920 Sun Hung Kai Properties Limited 16 -HK 1.40 94.450 Techtronic Industries Co., Ltd. 669 -HK 1.29 69.000 China Resources Land Limited 1109 -HK 1.29 31.550 Sino Biopharmaceutical Limited 1177 -HK 1.25 13.020 China Overseas Land & Investment Limited 688 -HK 1.21 24.700 Hang Seng Bank, Limited 11 -HK 1.19 122.000 Sands China Ltd. 1928 -HK 1.11 30.600 China Petroleum & Chemical Corporation Class H 386 -HK 1.07 3.470 BOC Hong Kong (Holdings) Limited 2388 -HK 1.06 22.450 China Mengniu Dairy Co., Ltd. 2319 -HK 1.02 29.000 Shenzhou International Group Holdings Limited 2313 -HK 1.01 96.000 Sunny Optical Technology (Group) Co., Ltd. 2382 -HK 0.98 108.000 Country Garden Holdings Co. Ltd. 2007 -HK 0.96 9.790 CSPC Pharmaceutical Group Limited 1093 -HK 0.93 15.660 Power Assets Holdings Limited 6-HK 0.79 44.500 Geely Automobile Holdings Limited 175 -HK 0.76 10.900 MTR Corporation Limited 66 -HK 0.75 38.400 WH Group Ltd. (HK) 288 -HK 0.74 6.600 PetroChina Company Limited Class H 857 -HK 0.73 2.710 CITIC Limited 267 -HK 0.71 7.680 New World Development Co. Ltd. 17 -HK 0.65 8.250 China Shenhua Energy Co. Ltd. Class H 1088 -HK 0.62 14.320 Hengan International Group Co., Ltd. 1044 -HK 0.59 64.600 Bank of Communications Co., Ltd. Class H 3328 -HK 0.54 4.820 Henderson Land Development Co. Ltd. 12 -HK 0.54 28.950 Hang Lung Properties Limited 101 -HK 0.43 16.820 Wharf Real Estate Investment Co. Ltd. 1997 -HK 0.42 30.750 CK Infrastructure Holdings Limited 1038 -HK 0.41 40.200 Want Want China Holdings Limited 151 -HK 0.40 5.670 Sino Land Co. Ltd. 83 -HK 0.37 9.370 AAC Technologies Holdings Inc. 2018 -HK 0.36 41.900 China Unicom (Hong Kong) Limited 762 -HK 0.35 4.420 Swire Pacific Limited Class A 19 -HK 0.27 42.600 Note Index weight data are as of 1 June 2010. Source: Fact Set Mirae Asset Daewoo Research 2 June 8, 2020 Asia Strategy Figure 1. Chinese southbound weekly net buying has been supportive of the Hong Kong market (RMBbn) 10 5 0 -5 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 Source: Bloomberg Figure 2. Hong Kong vs. Shanghai P/E trends: Hong Kong Figure 3. Chinese GDP growth likely troughed in 1Q20; US and looks attractively valued the rest of the world look set to trough in 2Q20 (x) (%) 20 HSI P/E SHCOMP P/E 20 China real GDP YoY US real GDP YoY 18 10 16 14 0 12 -10 10 8 -20 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19 Dec-19 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 Source: Bloomberg Source Bloomberg consensus Mirae Asset Daewoo Research 3 June 8, 2020 Asia Strategy APPENDIX 1 Important Disclosures & Disclaimers Hong Kong and Korea Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with either (1) the Korea Financial Investment Association and are subject to Korean securities regulations, or (2) the Securities & Futures Commission of Hong Kong.