Be cautious amid macro uncertainty

• Chinese equity markets rebounded in 2024, boosted by changes in domestic politics, but uncertainties in global trade, supply chains and geopolitical dynamics could weigh on confidence in 2025.
• BoA adds that the strength and scope of the announced policies have yet to be seen, and that the effect will be delayed by quarters.
• H-shares and ADRs are subject to financial separation, while A-shares are more affected by trade tensions.
• Strategy: Start defensive (high yield/value) in early 2025 and add quality beta during corrections or stimulus. Stronger growth is possible in 2H25 if credit growth accelerates.

Market: The worst of the downgrades and run-off sales is over

• The MSCI China Index is up 16% in 2024 after losing nearly 50% in the previous three years.
• Sectors with the best results: IT (+40%), Finance (+38%), Communications (+26%).
• Bad results: healthcare (-20%), real estate (-11%).
• Estimated P/E increased to 10x (below the long-term average of 12x), with EPS growth forecasts of 18%/9% for 2024/2025. faced with negative risks.

Macro: Strong stimulus needed for recovery in 2026

• GDP growth is expected to weaken in 2025, which will require stimulus measures to kick-start the recovery in 2026.
• Credit growth must increase from <8% to nearly 9% annually in 2025. Key expectations include:
  • 40-60bp LPR cuts.
  • Larger budget deficit (~4%).
  • Some RMB depreciation.
• Broader measures are needed to support employment, consumption and structural reforms.

Model portfolio settings

• Preferred Sectors: Internet (media/online retail), non-banking finance, IT hardware, semiconductors and shipping (localization theme).
• Sectors at lower levels: alcoholic beverages, telecommunications, heavy machinery and healthcare (due to negative earnings revisions).
• Cautious outlook: coal, real estate and construction materials.

This article was written by Eamonn Sheridan at www.forexlive.com.



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