Closed up for 9 consecutive trading days, Davis double-clicked, this index led the world! Multiple positive boosts, institutions are optimistic about the "red May" of A-shares

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During the "May Day" period, Hong Kong stocks led the world, how will A-shares perform in May?

In the two trading days during the "May Day" period, Hong Kong's Hang Seng Index closed up more than 4%, ranking first among the world's major stock indexes, with a cumulative increase of nearly 5% in a week. Looking ahead, the Hang Seng Index has closed up for nine consecutive trading days, the longest winning streak since 2018.

From the perspective of the international market, the European and American markets rose and fell, and the British stock market continued to hit new highs; the US stock index fell first and then rose, returning to the 60-day moving average, of which the Nasdaq rose by more than 3%, and the Dow and S&P 500 increased by about 2%.

Analysts believe that the main reason for the rebound in the European and American markets is still betting on the Federal Reserve to cut interest rates. The U.S. jobs report for April came in well below expectations, and expectations that the Federal Reserve may soon start cutting interest rates have been further strengthened. The Hong Kong stock market, which is at a global low valuation, is more sensitive to interest rates and has entered a technical bull market, and Chinese assets represented by technology stocks are even more imposing. In the case of the general improvement of the external market, especially the sharp rise of Hong Kong stocks, the "red May" of A-shares is worth looking forward to.

Hong Kong stocks led the global gains

During the "May Day" period, Hong Kong stocks continued their previous upward momentum, and on May 3, the Hang Seng Index opened higher and closed at 18,475.92 points, a new high in eight months. Technology stocks performed even better, with the Hang Seng Tech Index surging 2.74% to stand above the 4,000-point mark during the session. Throughout the holiday, the Hang Seng Index surged more than 4% to lead the global gains, while the Hang Seng Tech Index surged more than 7%.

In terms of heavyweight stocks with a market value of more than 100 billion yuan, Kuaishou-W, Jingdong Group-SW, and Ping An of China rose by more than 10%, while more than 30 stocks such as Meituan-W, Standard Chartered Group, and Shell-W rose by more than 3%.

From the perspective of the external market, the three major U.S. stock indexes have risen for at least two consecutive days, recovering the losses of the previous continuous decline. From May 1 to May 3, the Dow rose 2.27%, the Nasdaq rose 3.18%, and the S&P 500 rose 1.83%.

Chinese assets listed on the U.S. stock market soared, with the Nasdaq China Golden Dragon Index soaring 8.47% in three days, and companies with a market value of 100 billion yuan such as Shell, JD.com, Ctrip Group, NetEase, and Pinduoduo all rose more than 10%. European stocks rebounded en masse on Friday, led by U.S. stocks, with Britain's FTSE 100 hitting a new high.

On the news side, a blockbuster data detonated the European and American stock markets. Before the U.S. stock market on Friday, local time, the U.S. labor market report showed that the number of U.S. non-farm payrolls in April was 175,000, down more than 40% from 315,000 in the previous month, and far lower than expected. The consensus expectation was that U.S. employers added 240,000 jobs in April. After the data was released, traders brought forward their expectations for the Fed's first rate cut from November to September, and U.S. interest rate futures expected the Fed to cut rates by 25 basis points twice in 2024, compared to one before the release of the non-farm payrolls data.

Davis of Hong Kong stocks double-clicked

As we all know, Hong Kong-listed companies are mainly domestic companies, and their profitability is driven by the domestic economic cycle and earnings cycle. At the same time, the risk-free rate for Hong Kong stocks is determined by the US dollar interest rate, which is driven by the Federal Reserve's monetary policy cycle.

In this context, when the domestic economic development is relatively average and the US dollar interest rate continues to rise, the performance of the Hong Kong stock market is often suppressed; at the same time, when the domestic economy is expected to improve and the US dollar interest rate is expected to fall, the Hong Kong stock market, which is at the low level of the global stock index, has ushered in a big explosion.

The Hong Kong stock market ushered in Davis's double-tap. On the one hand, the US dollar interest rate is expected to be downward, and on the other hand, the domestic economic cycle is beginning to stabilize and rise. Data released by the National Bureau of Statistics in April showed that GDP grew by 5.3% year-on-year in the first quarter, far exceeding market expectations. On April 30, the Bureau of Statistics announced that the manufacturing PMI index in April was 50.4%, which was in the expansion range for two consecutive months, indicating that the economy is in a moderate recovery stage.

In addition, the property market, which is quite concerned by the market, seems to have ushered in a major turnaround. On April 30, the Politburo of the Central Committee of the Communist Party of China held a meeting, which specifically mentioned the adjustment policy on the real estate market, "digesting the stock of real estate and optimizing the incremental housing". Institutions generally believe that the new proposal marks an important shift in the thinking of real estate market regulation and is expected to boost the sluggish real estate market.

In terms of valuation, as of May 3, the Hang Seng Index has a rolling P/E ratio of 9.41x, which is at the 31.86% quantile of the past decade, and a price-to-book ratio of less than 1x, only 0.92x, which is at the 13.29% quantile of the past decade. Compared with the global stock market, the absolute valuation and valuation quantile of Hong Kong stocks are significantly lower.

In addition, the Hang Seng Index has a decent dividend yield, with the latest dividend yield of 3.91%, which is only lower than the resource-heavy Brazilian and Australian stock markets, and the third highest in the world.

Institutions are optimistic about the A-share "Red May"

In the short term, driven by the sharp rise in the external market, especially Hong Kong stocks, the "red May" of A-shares is worth looking forward to.

Everbright Securities said that after the full disclosure of the financial report, the recovery of fundamentals is expected to be further verified at the data level, and market expectations may also return to stability. In addition, the gradual introduction and implementation of relevant policies in the capital market in the future will also play a stabilizing role in market expectations and confidence. Driven by both fundamentals and policies, the market is expected to remain stable after April, and the stock market is expected to continue to rise.

UBS's recent research report shows more attractive long-term returns for Chinese assets. The report notes that MSCI China has narrowed the ROE gap with other countries in emerging markets over the past 18 months, but in the intervening years, valuations have shifted from premium to discount. At the current ROE in China, which should be at a 13% premium to emerging markets, is actually a 40% discount. Even recovering only half of the valuation gap described above would give a lot of upside. This is especially true for Hong Kong stocks.

UBS also pointed out that the Chinese pool is still too small for large funds with global allocations to not need to divest significantly from developed markets (Microsoft's weighting in the MSCI World Index alone is about 1.5 times that of China). Global active funds are currently underweighted to China by 80 basis points, and China as a whole is only 2.6% weighted by MSCI, which is a third of the underweight.

Morgan Stanley, Goldman Sachs and other foreign institutions are also optimistic about Chinese assets. Goldman Sachs said that if A-shares can close the gap with the global average in terms of shareholder returns, then A-shares could rise by about 20%, and if they can reach the level of the global leaders — the most optimistic scenario, the rise could be as high as 40%.

Disclaimer: All information content of Databao does not constitute investment advice, the stock market is risky, and investment needs to be cautious.

Editor-in-charge: He Yu

Proofreader: Tao Qian

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