China Macro Commentary: Remain Bullish On FXI And Property Names

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Includes: EJ, FXI, LEJU, SFUN, XIN
by: WestEnd511

Summary

Shanghai composite continues to rally with the expectation of more favorable policy.

Rally is expected to continue due to attractive liquidity and financial market liberalization.

Prefer FXI, EJ, SFUN, LEJU and XIN.

Event

The Chinese A-shares are rallying once again last week. The Shanghai A-shares were up +9.5% over the week led by the bankers, brokers and insurance companies. This compared with the Hang Seng Index in Hong Kong that was only up +4% during the week. YTD the Shanghai Composite is up a whopping +40% as the investment community that is mostly retail driven expects further policy easing. The more institutional driven Hang Seng composite is not as bullish, up only +4% YTD. The divergence between the two markets is increasingly evident over the past two weeks and I believe that this is driven by the mainland investors' bullish sentiment towards the equities market as they look toward further stimulus by the government to jumpstart the economy. Moreover, interest in wealth management and fixed assets has been waning due to lower yield so investors are starting to look for a place to where they can 1) achieve sufficient liquidity with their capital and 2) achieve higher short-term return. Note that I said short-term return, and this is important because this is all that the mainland investors look for when it comes to investment, an attribute that also highlights the risk of downside for the market. Nonetheless, the recent rally has convinced enough investors to embrace the equity market again, and the recent introduction of margin financing and structured investment through trust companies are further fueling the rally for the Shanghai Composite.

This week will be packed with macro data. The PMI data from last week showed that the Chinese economy is still weak with weak new orders and corporate destocking. However, the light at the end of the tunnel is that property sales are gradually inching higher in the 30 major cities across the country and turning positive for the first time this year (+6% in November). When the first batch of medium term lending facility, or MLF, expires this month, the chance of an RRR cut becomes highly likely.

Key macro events this week: On Tuesday, we have Chinese CPI number out. Consensus expects +1.6%, and on Thursday evening, we have China fixed asset investment, retail sale and industrial production numbers out for November. Consensus expects FAI growth of +15.8% YTD, retail sale +11.6% (vs. 11.5% previous) and industrial production growth of +7.5% (vs. 7.7% previous).

Conclusion

I continue to be bullish on the Chinese equities that have direct exposure to property stocks and will be overweight FXI, which has seen a decent rally (+6% last week). On individual stocks, I would be overweight on Leju (NYSE:LEJU), E-House (NYSE:EJ), Soufun (NYSE:SFUN) and Xinyuan (NYSE:XIN).

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.