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Some Thoughts Of The Returning Bull In China

1. Excluding the recent release of Euro/German PMI, global economic indicators in Jan/Feb are bottoming out from 2018, and March data will make an effective verification of the trend. 

2. Recent yield curve inversion is not a sufficient signal for U.S. recession as the quantitative easing drives down the term structure. Thus, the forecasting power of inversion fades unless the extent of inversion far exceeds the previous episodes. 

2. Events that dragged the economy and markets last year are still at the center of the discussion, namely, U.S China trade war and Brexit. The trade dispute is improved significantly following the soft stance of Beijing, and it is a matter of time that when the issue can be fully resolved. But Brexit prospect is still clouded.

3. The Chinese economy is past the worst of 2018, primarily driven by the strong credit recovery on easing policy. March TSF can confirm the trend. 

4. MSCI A-shares inclusion ratio ramp up is certainly a catalyst, but the potential inflow of around US$80bn is relatively minimal. Whether China A will raise its importance in foreign fund allocation still depends on the progress of market openness (e.g. raise or abolish the foreign holding limit at 30%).

5. U.S. dollars may not be as weak as expected in 2019 as U.S. economy still holds up well and the European Union does not tighten its monetary policy as much as expected underpinned by weak economic growth of its members. This will weigh on EM but not China as the authority will control the currency to prevent a further dispute with U.S.

6. The rally of Chinese equity markets (A/H/ADR) should fade as the sharp improvement in trade tensions and credit may not happen again. That said, a moderate rise is likely in the next three months if there is no material change in currently supportive government policy and US-China trade truce, which are key to the current optimistic market sentiment. As a substantial broad market gain may have already passed, alpha generation is back to the company with strong earnings growth and not excessive valuations. Leaders will continue to lead the market and sector rotations will be slowed. Consumer Discretionary, Staples, IT, Communication Services are likely to outperform others.