Credit Suisse has raised its recommendation for Hong Kong equities to “outperform” from “neutral” to reflect the surge of liquidity from mainland investors as a result of Beijing’s easing policies.
“Significant inflows of mainland liquidity into Hong Kong since late March have lowered the cost of equity and supported the revaluation of H shares and Hong Kong equities,” chief investment officer for Asia Pacific Fan Cheu-kwan said in the bank’s Private Banking and Wealth Management Investment Monthly report released on Wednesday.
Benefiting from China’s intensified policy easing and capital market liberalization as well as the global cyclical recovery, North Asian equity markets are expected to outperform their global peers while valuations are more attractive than their Southeast Asian peers, the report said.
“The larger than expected 100 basis point reserve requirement ratio (RRR) cut by the People’s Bank of China has signaled a more aggressive monetary easing stance in response to rising deflation risks, liquidity pressure from continued capital outflow and near-term financing needs of the 1 trillion yuan (US$161.2 billion) local government debt swap program,” Fan said. “China’s economic disappointments … have heightened the need for significant easing of monetary conditions.”
Credit Suisse economists expect another 25 basis point cut in the policy rate in the next three months, and there is room for further RRR reduction from the current historically high level of 18.5 percent.
The bank maintains “outperform” equity views on Japan, Australia, China and Taiwan and lifts Hong Kong and South Korea to “outperform” from “neutral”.
However, it changed its view on India equity to “neutral” versus the Asian benchmark due to a less positive cyclical indicator.
In addition, it downgraded commodities amid the slowdown in China, which is less supportive of industrial commodities in the short term.
But oil could outperform within the commodities space, Fan said.
Net capital flows into India, Indonesia, Korea and Malaysia are likely to be most affected in Asia ex-Japan if volatility rises and US dollar liquidity falls significantly when the Federal Reserve starts its rate hike cycle.
China and the Philippines will be the least impacted during the period, and the effects on Singapore, Taiwan and Thailand should be neutral, chief Asia economist Sailesh Kumar Jha said.
The company expects the Fed rate hike cycle to start in September and reach around 1 percent in March 2016.
– Contact us at [email protected]