Near-term volatility to precede medium-term uptrend. Volatility is likely to bethe order of the day in the near term ahead of a clearer assessment of Dubai’spotential impact. However, we are still bullish on the Hong Kong market’s outlookfor 1H10. For one, we believe the concern over Chinese banks’ capital isoverdone. Secondly, Chinese policymakers have re-emphasised their pro-growthstance for 2010. We expect liquidity in China to remain ample and support highergrowth in domestic demand. In turn, we foresee continued strength in corporateearnings recovery, particularly in the consumption space. Lastly, persistently lowUS$/HK$ interest rates and speculation of Rmb appreciation should supportfurther upside.
Dubai – a hiccup rather than a detour. The immediate impact on HK-listedcompanies’ earnings seems limited. HSBC and Standard Chartered face thehighest risk, with loans to the UAE estimated to be around 3% of book value. Butthe potential earnings impact for companies within our coverage is much lower.
The sentiment hit from Dubai’s debt issue, however, is harder to gauge and mayspark near-term volatility as investors lock in gains before year-end.
Growth is still a priority for China in 2010. During the Central Economic WorkConference last Friday, the Politburo agreed to continue its proactive fiscal policyand maintain a moderately loose monetary policy next year. The focus will be onpropping up domestic consumption to provide a more sustainable growth model, aview echoed by the Ministry of Commerce during a weekend forum.
Focus on consumption, Chinese banks, coal and steel. We continue to likeconsumption plays given unwavering topdown support. In particular, we likesportswear plays for their improving sales and auto plays for demand support fromlikely subsidy extensions and a favourable replacement cycle. We also like coaland steel plays for rising product prices. We believe PRC banks will make acomeback after being dragged down by overblown capital raising concerns.
Adding consumption and steel exposure to conviction buy list. To addexposure to consumption and steel, we have included Anta and Maanshan in ourconviction buy list. We have also taken out COLI and BOCHK to reduce exposureto PRC property and Hong Kong banks. We have switched out of Shenhua toChina Coal and out of China Green to China Yurun in their respective sectors.
