China and Hong Kong were fairly well insulated from severe Brexit shock compared to the UK and Europe:
The firm said it also did not expect a strong impact on the Chinese economy, which was in a sustained slowdown before Brexit.
“Following the Brexit vote, China will need to redesign the trade treaties with the UK, but the new treaties are unlikely to seriously dampen growth of bilateral trade between the two countries. However short-term sluggishness of the EU may weigh on China’s exports, increase the downside pressure on Chinese money and urge policy-makers to maintain loose monetary policies.”
Low valuations
Hong Kong’s more international market will likely be volatile this year, but the firm added that demand for China shares listed in Hong Kong could rise.
“The quota for the southbound Shanghai-Hong Kong Stock Connect could run out soon. With around 80% of the RMB 300bn ($45bn) aggregate southbound quota being used up (as of 15 July), the remaining RMB 50 billion quota may be depleted within the next couple of months or weeks, assuming an average of RMB 1.2bn daily net buying as in July so far.”
In equities, valuations are in the spotlight. “Valuation for the MSCI China index now sits at an attractive level of 1.4x trailing price-to-book, which is around 1 standard deviation lower than its 10-year average of 2.1x.”
Among their sector allocation ideas, HSBC GAM is overweight China’s auto sector, “mainly on companies with strong product pipeline focusing on the SUV segment, as SUV sales in China continue to gain momentum”.
Out of favour are utilities due to tariff cuts or consumer staples due to high valuations, strong competition and slowing GDP growth. The firm is also negative on banks, citing the potential for non-performing loans to rise as economic growth slows.
