CEBI Research 2019 Market and Investment Outlook Contents Global Economic Outlook for 2019: A bumpy road for global economy .............................. 2 China Economic Outlook for 2019: Growth deceleration in the wake of trade war ........... 13 China Policy Outlook for 2019 ................................................................................................ 18 Hong Kong Economic Outlook for 2019 ................................................................................ 21 Investment Strategy and Themes for 2019 ............................................................................ 25 Sector Outlook ─ China Banks .............................................................................................. 30 Sector Outlook ─ China Property .......................................................................................... 39 Sector Outlook ─ HK Property ............................................................................................... 47 Sector Outlook ─ China Infrastructure .................................................................................. 54 Sector Outlook ─ Environment .............................................................................................. 65 Sector Outlook ─ Technology ................................................................................................ 72 Sector Outlook ─ Automobile ................................................................................................ 81 General Disclosures and Disclaimers ................................................................................... 88 Contributors Banny Lam Dominic Chan Head of Research Senior Equity Analyst [email protected] [email protected] (852)2916-9630 (852)2916-9631 Stanley Tang Analyst [email protected] (852)2916-9632 December 17, 2018 1 2019 Global Economic Outlook for 2018: Global economy to gain more traction 2019 global economic outlook: A bumpy road for global economy The global economic recovery continues at a decelerating pace with which diverging trends of growth momentum in different economies become more apparent. The trump’s tariffs, mounted geo-political risks, the tightened monetary stance of the U.S. and Eurozone, postponement of Brexit vote by UK Parliament, Italy’s fiscal standoff and turbulence of emerging market (EM) currencies are dragging down market sentiment and weighting on the growth momentum of global economy. Volatilities of global financial markets are skewed to the high side and a clouding global growth outlook comes with elevated economic and political risks. Amid rising interest rates and growing disputes over trade, the International Monetary Fund (IMF) has downgraded the forecasts of global growth for 2018 and 2019 from 3.9% to 3.7% in October 2018. The continued complication of worldwide business environment could make the global economic recovery more challenging. Geo-political risks remain high across the Middle East, Eurozone, the U.K and Korean Peninsula, which add anxiety and confusion to global financial markets. In the face of growth headwinds as well as diverging monetary stance of major economies, the global economy is on the brink of further slowdown in 2019. For the U.S, protectionism remains as the major economic risks for global recovery. Despite temporary ceasefire of trade war with China for 90 days, the U.S. trade disputes with trading partners continue to stir fears that the global economy will spiral into a full-blown trade war. International trading activities compose of complex supply chain relationships across different countries with which physical trade disruptions driven by tariffs will definitely derail economic growth of different economies, especially those relying on exports. The downside risks are further enhanced by the tightening stance of U.S. monetary policy. As previous tax cuts effects start to fade and the mid-term election results set the stage of fiscal gridlock, U.S growth momentum is likely to face modest slowdown in 2019 but its economic performance still outperforms those of peers in the world. For Eurozone, economic uncertainties surrounded by Brexit and Italy’s budget dispute become major threats to economic stability in Eurozone. Eurozone faces surging economic and political risks, which are weighting on growth momentum driven by weakening corporate investments and consumer spending. The structural vulnerabilities, financial market fragmentation, weak bank balance sheets, Brexit and weak government finances, remain as the main challenges of Eurozone which will decelerate the growth in 2019. For Japan, economic relationships with the EU and China have been strengthened to resist the U.S. protectionism. Japan's huge trade surplus with the U.S. has drawn criticism with which Trump's administration aims to raise tariffs to lower the U.S. trade deficit and change unfair trade policies. Trade tariffs on Chinese goods have disrupted the supply chain, becoming a blow to Japan’s major exports of electronics products. In the face of trade war, Japan is stepping up its economic and financial cooperation with China and the EU by opening up and seeking more trade agreements to fight against prevailing protectionism. Japan is likely to maintain stable economic recovery in 2019. For China, the economy faced slowing momentum in 3Q2018 along with surging downward pressures on economic activities in 4Q2018, mainly driven by Trump’s tariffs and the tightening of U.S. monetary policy. The halting move by the U.S. 2 to keep the tariff rate at 10% on $200 billion worth of Chinese goods for 90 days will partially alleviate the growth headwind but China’s economy still faces moderation of growth. In recent months, China’s stock market has witnessed volatility and declines, driven by pessimistic investor expectations and sentiment regarding the economic outlook of China. In order to defuse uncertainty of the external environment and stabilize investor confidence, China has launched intensive policy measures to stabilize market, improve the market system, attract long-term capital inflow, deepen reforms of state-owned enterprises and private sectors, and further open up the market, thus ensuring soft-landing of the economy. It is foreseeable that the market will continue to fluctuate in near-term, but China’s policymakers will step up more efforts to revitalize market and ensure the sustainable development of China’s economy. We forecast China’s economy will slow within a reasonable range with the stable growth momentum in 2019. Table 1: Global economic forecasts YoY% 2013 2014 2015 2016 2017 2018E 2019E U.S. 1.8 2.5 2.9 1.6 2.2 2.8 2.6 China 7.8 7.3 6.9 6.7 6.9 6.6 6.3 Euro Area (0.2) 1.4 2.1 1.9 2.4 2.0 1.8 Germany 0.6 2.2 1.5 2.2 2.5 1.9 1.8 France 0.6 1.0 1.0 1.1 2.3 1.7 1.7 Italy (1.7) 0.1 1.0 0.9 1.5 1.0 0.8 Spain (1.7) 1.4 3.6 3.2 3.0 2.5 2.1 Netherlands (0.1) 1.4 2.0 2.2 2.9 2.8 2.6 Greece (3.2) 0.7 (0.3) (0.2) 1.4 2.0 2.2 Portugal (1.1) 0.9 1.8 1.6 2.7 2.3 1.8 Ireland 1.3 8.7 25.0 4.9 7.2 4.7 4.2 UK 2.0 2.9 2.3 1.8 1.7 1.3 1.3 Japan 2.0 0.4 1.4 1.0 1.7 1.3 1.1 Canada 2.5 2.9 1.0 1.4 3.0 2.2 2.1 Australia 2.2 2.6 2.5 2.6 2.2 3.0 2.8 New Zealand 2.2 3.2 4.2 4.1 3.0 3.0 3.0 Mainland China 7.8 7.3 6.9 6.7 6.9 6.6 6.3 Hong Kong SAR 3.1 2.8 2.4 2.2 3.8 3.6 3.0 India 6.4 7.4 8.2 7.1 6.7 7.4 7.6 Singapore 5.1 3.9 2.2 2.4 3.6 2.7 2.4 South Korea 2.9 3.3 2.8 2.9 3.1 2.6 2.4 Taiwan 2.2 4.0 0.8 1.4 2.9 2.6 2.3 Source: IMF, CEBI Forcasts Fig. 1: Global GDP growth Fig. 2: VIX Index 6 5.4 25.0 23.0 5 4.3 21.0 3.6 3.7 3.7 3.7 4 3.5 3.5 3.4 3.3 19.0 3 17.0 15.0 2 13.0 1 11.0 9.0 0 Jul-16 Jul-17 Jul-18 Jan-16 Jan-17 Jan-18 Jun-16 Jun-17 Jun-18 Oct-16 Oct-17 Oct-18 Apr-16 Apr-17 Apr-18 Feb-16 Sep-16 Feb-17 Sep-17 Feb-18 Sep-18 Dec-16 Dec-17 Aug-16 Aug-17 Aug-18 Nov-16 Nov-17 Nov-18 Mar-16 Mar-17 Mar-18 May-16 May-17 May-18 Dec-18* *IMF Forcasts *14th December 2018 Source: Bloomberg Source: Bloomberg 3 Fig. 3: JPMorgan/Markit Manufacturing/Service PMI 57.0 55.0 53.0 51.0 49.0 Jul-15 Jul-16 Jul-17 Jul-18 Jan-15 Jan-16 Jan-17 Jan-18 Jun-15 Jun-16 Jun-17 Jun-18 Oct-15 Oct-16 Oct-17 Oct-18 Apr-15 Apr-16 Apr-17 Apr-18 Feb-15 Sep-15 Feb-16 Sep-16 Feb-17 Sep-17 Feb-18 Sep-18 Dec-15 Dec-16 Dec-17 Aug-15 Aug-16 Aug-17 Aug-18 Nov-15 Nov-16 Nov-17 Nov-18 Mar-15 Mar-16 Mar-17 Mar-18 May-15 May-16 May-17 May-18 JPMorgan/Markit_Manufacturing JPMorgan/Markit_Service Source: Bloomberg The U.S.: Fading fiscal stimulus and trade war woes pointing to slower growth momentum In 2018, economic recovery of the U.S. economy has been accelerating with the fundamentals improving in varying degrees. The U.S. economy grew at an annualized rate of 4.2% and 3.5% in 2Q2018 and 3Q2018, led by surging personal consumption expenditure and non-residential fixed investment, indicating that the recovery momentum is on track. The unemployment rate continued to trend down to 3.7% in November, the lowest level since 1969 while both headline inflation and core inflation stayed at above 2%. We expect the Fed will lift the benchmark federal funds rate by 25bps in December FOMC meeting and the U.S.