The focus for equity clients today is China. What happens from here? The Shanghai Composite saw its worth daily % fall since February 27, 207 on Monday (June 27, 2015), leaving more than two-thirds of companies in the index to hit their down limit.
“Although our strategy and Sales and Trading teams see the possibility of the market seeing a few more days of selling pressure, we remain constructive as long as the government continues to act appropriately. This means providing market-oriented and credible policy changes, such as RRR cuts, stock buybacks, and even a stabilization fund in the face of equity market volatility and weak macro data points.
Explaining the China move today is challenging given there was no specific news story out there. The most recent bit of news is the State Council news on Friday around potential band widening. Did this cause the sell off? Very mixed responses to this as it depends on what one thinks will happen to the capital account on inflows/outflows. There are also question marks on what matters to China more: SDR inclusion or saving the equity market, as IMF has been fairly vocal around their view on letting the onshore equity market freely trade without such high suspensions.
“Although our strategy and Sales and Trading teams see the possibility of the market seeing a few more days of selling pressure, we remain constructive as long as the government continues to act appropriately. This means providing market-oriented and credible policy changes, such as RRR cuts, stock buybacks, and even a stabilization fund in the face of equity market volatility and weak macro data points.
Explaining the China move today is challenging given there was no specific news story out there. The most recent bit of news is the State Council news on Friday around potential band widening. Did this cause the sell off? Very mixed responses to this as it depends on what one thinks will happen to the capital account on inflows/outflows. There are also question marks on what matters to China more: SDR inclusion or saving the equity market, as IMF has been fairly vocal around their view on letting the onshore equity market freely trade without such high suspensions.
Outside of the above, here are the reasons we could find for the weakness today both in HK and mainland markets:
· Institutional investors are very limited in what they can sell onshore. As a result of this there seems to be selling offshore in any related proxies to hedge long domestic risk. This has been evident over recent weeks across a range of China related growth proxies.
· Fears of Chinese government stabilization fund stepping out
· Weak PMI increases worries on economic growth, and proves that recent easing has not filtered through well
· Onshore investors switching out of equities into bonds as defensive/rotational play in view of more rate cuts to drive bond prices higher
· Month end plus XUA/HK expiry; thus lots of re-positioning/balancing
In short, our view has not changed. The market may see a few more days of selling pressure as it may take time to digest possible stop loss/margin call. We believe that China is in a ‘Lehman Moment’ and the government needs to continue to provide market-oriented and credible policy changes. The A share SHCOMP, market is likely to be range bound between 3400~4500 but for the H-share, the MXCN trades at 9.3X 12m fwd. P/E, 23% below 10-year average so we are much more constructive. We believe the upcoming macro data stabilization towards Q4 2015 witnessed by recent leading IP indicator stabilization and further decrease of property inventory take-up months, will act as key catalysts.”
· Institutional investors are very limited in what they can sell onshore. As a result of this there seems to be selling offshore in any related proxies to hedge long domestic risk. This has been evident over recent weeks across a range of China related growth proxies.
· Fears of Chinese government stabilization fund stepping out
· Weak PMI increases worries on economic growth, and proves that recent easing has not filtered through well
· Onshore investors switching out of equities into bonds as defensive/rotational play in view of more rate cuts to drive bond prices higher
· Month end plus XUA/HK expiry; thus lots of re-positioning/balancing
In short, our view has not changed. The market may see a few more days of selling pressure as it may take time to digest possible stop loss/margin call. We believe that China is in a ‘Lehman Moment’ and the government needs to continue to provide market-oriented and credible policy changes. The A share SHCOMP, market is likely to be range bound between 3400~4500 but for the H-share, the MXCN trades at 9.3X 12m fwd. P/E, 23% below 10-year average so we are much more constructive. We believe the upcoming macro data stabilization towards Q4 2015 witnessed by recent leading IP indicator stabilization and further decrease of property inventory take-up months, will act as key catalysts.”
China: Courtesy of Campbell Burr and Eddie Chung, International equity sales.
Europe: Courtesy of Christian Raute, our global head of Central Risk Desk Strategy.
“I am getting concern we may get stuck in (rather than quickly swing out) this sharp equity downswing,” says Raute. “Most macro-economic factors attempting to rally stocks but they remain down. Credit Spreads (the defensive one) are materially higher. As we noted, this is not a great period for Betas. Even the safe and boring Z U5 Index (FTSE 100 future, Sep15) is down ~2.25% in two sessions.
My issue is that these concerns are hitting the tapes on a thin market. For me this is a period for capital preservation and to look for the turning point within the regime. Keep an eye on the Oil Factor CIISOPEP Index (CitiOilPrice Europe) for an inflection point.”