China and the United States finally signed the first-phase trade agreement on January 15th, which is roughly similar to the one announced last December
The United States agreed to phase out tariffs, and China will increase imports of US $ 200 billion in goods and services from the United States in 2020 and 2021, strengthen intellectual property protection, end mandatory technology transfers, and open up the financial services industry. The two sides also promised to prevent competitive exchange rate depreciation and establish a dispute resolution mechanism. Although the first phase of the trade agreement is not a “magic bullet”, it still helps the second phase of trade negotiations. US President Trump plans to travel to Beijing to begin negotiations on a second-phase trade agreement.
Sino-US trade disputes have eased, leaving more room for the Chinese government to focus on the domestic economy. At a Central Economic Work Conference held in December last year, government leaders said they needed to reduce corporate borrowing costs to affordable levels. The central bank immediately announced on January 2, 2020 that it will reduce the bank deposit reserve ratio by 50 basis points from January 6. This is the eighth reduction in the People’s Bank of China since 2018. It is expected that this reduction will release 800 billion yuan of liquidity to avoid excessive liquidity tightening due to the surge in cash demand before the Lunar New Year holiday. The market expects that the loan market quoted interest rate will continue to decrease this year to extend the overall business cycle.
H shares benefited from energy interior housing
For the Chinese and Hong Kong stock markets, risk appetite began to pick up in December last year and may continue into the second quarter, because the tone of the external and domestic policies is still positive for the stock market. As social events in Hong Kong continue to be uncertain, we continue to focus on Chinese domestic demand stocks. Global Funds continued to shift from safe-haven assets to risky assets, and from leading markets to backward markets.
The H-share market will benefit from this, as its performance and capital flow lag behind last year. Data show that overseas funds continue to flow into H-shares, and southbound capital inflows have also maintained a good speed, mainly concentrated in the banking, energy, materials, technology and real estate sectors.
We prefer A-shares over H-shares because: 1) the sector is more favorable. The A-share market has sectors not covered by H-shares, namely technology, biotechnology, healthcare and some well-known consumer stocks; 2) In the short term, China is still a policy-driven market, that is, A-shares are more affected by policies Directly; 3) In the long run, as China continues to open its financial market, the increase in the MSCI index into A shares will introduce more funds to the onshore market.
5G becomes the global focus this year
As for the sector, we are relatively cautious about the Bank of China’s stocks, as the net interest margin of domestic banks is shrinking and credit costs are rising. If investors are looking for returns, REITs are a good choice. Although there are some capacity constraints in China’s infrastructure sector, business prospects and the “Belt and Road” participants are expected to continue to benefit from fiscal stimulus policies. As a result, infrastructure and engineering and construction companies’ revenues have continued to grow. However, we are concerned about the balance sheets of some companies, especially their ability to repay on time.
We are optimistic about 5G technology, real estate and consumer sectors, especially commerce. 5G is clearly the global focus in 2020. At the same time, it is optimistic about China’s real estate developers and China’s property management sector. The overall valuation of real estate stocks and the dividend yield are attractive, while the latter has just entered the early stage of structural expansion and is less sensitive to policy changes; the consumer sector is still relatively the economic driver that the government has more control over. E-commerce has benefited from the commercialization of 5G technology, and its market share is expected to continue to rise.