Citigroup Upgrades Hong Kong Stocks, Boosting Buy China Calls

The Exchange Square Complex, which houses the Hong Kong Stock Exchange, in Hong Kong, China, on Wednesday, July 13, 2022. Hong Kong is likely to see more dual-traded companies shift toward primary listings in the financial hub as they seek inclusion in trading links with mainland China, according to the exchange's Chief Executive Officer Nicolas Aguzin. Photographer: Paul Yeung/Bloomberg , Bloomberg

Abhishek Vishnoi, Bloomberg News

Nov 20, 2022

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(Bloomberg) -- Citigroup Inc. turned more bullish on Chinese stocks, upgrading Hong Kong to overweight in Asia, saying Beijing’s pivots on Covid Zero and property should lift earnings.

“Reopening — along with support for the property sector — should help stabilize the current China EPS downturn and support investor sentiment,” strategists including Robert Buckland wrote in a note dated Nov. 20. “China could offer an attractive domestic-driven recovery story even as other major economies are slowing sharply.”

While the 12-month forward earnings estimate for the MSCI China Index languishes close to a multi-year low, market participants from New York and London to Hong Kong have recently turned bullish on China amid President Xi Jinping’s shift from draconian Covid restrictions and rigid property policies. 

Benchmark indexes in Hong Kong surged into bull markets in recent weeks, after featuring among the world’s worst performers for much of this year. The Shanghai Composite Index has made a u-turn after testing a 17-year support.

To be sure, Buckland and team said they wouldn’t aggressively chase the prospect of a cyclical earnings recovery in China as it remains “poor at turning GDP into EPS”. A surge in Covid-related infections could test the tolerance of Chinese authorities on easing virus-induced curbs.

Citigroup upgraded the MSCI China Index to overweight in Asia model allocation on July 7. Since then, the gauge has fallen 22%.

Among other allocation changes, the strategists downgraded Taiwan to neutral and South Korea to underweight saying both should see a contraction in earnings. While they kept India at neutral, citing rising investor focus on China reopening, they said the firm may look to rebuild an overweight on the South Asian market “when the action elsewhere starts to fizzle out.”

In Southeast Asia, they raised Malaysia to overweight while downgrading Indonesia to neutral, saying the former has “firm GDP growth and reasonable valuation”. The bullishness on Malaysia comes even as the nation’s recently concluded election established its first-ever hung parliament.

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