The Chinese economy is descending into the late stage of its three-year economic cycle. The recent RRR cut to replace MLF should be seen as a sign from the central bank to reduce its balance sheet. Change in PBoC’s balance sheet tends to influence asset prices. Whenever the central bank’s balance sheet growth decelerates or even shrinks, stock prices suffer while market volatility is elevated. And the yuan weakens. We think real estate construction spending and infrastructure FAI will recover in 2H18, given the mantra of “guarding against risk”. But shrinking liquidity will likely make any rebound fleeting, before waking up to the reality that macro liquidity remains tight.
Risks are heightening. Smart money sentiment has plunged to extreme that augurs significant market dislocation. China consumer confidence has been inflecting from its peak, together with falling bond yields as a reflection of slowing economic growth, and tepid stock market return. ChiNext and small/mid caps’ relative return continues to recover from negative extremes. The Shanghai composite will likely spend at least six months below 3,300, from our original forecast in December 2017. Healthcare, energy, consumption and utilities, underdogs from last year, should see their fortune reversed.
The following stocks are our analysts’ top Buys for respective sectors in 2H18. These stocks are expected to outperform their sectors in the second half: Agricultural Bank of China (1288 HK), Taiping Insurance (966 HK), Shimao Property (813 HK), MGM China (2282 HK), Tencent Holdings (700 HK), Hua Hong Semiconductor (1347 HK), Sino Biopharm (1177 HK), Everbright Greentech (1257 HK), ENN Energy (2688 HK), Brilliance China (1114 HK), Huadian Fuxin (816 HK), Cathay Pacific (293 HK), Beijing Capital Int’l Airport (694 HK), and China Railway Group (390 HK).