Profit core assets into a new cycle: Chinese core assets globally competitive is what?

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Lead: big trend of Hong Kong stocks fundamentals What will be?

text | Societe Generale Securities Zhang Yidong source | Reuters editor | Poker investor, please indicate the source

Societe Generale Securities
Zhang Yidong published policy speech, he said, Hong Kong is a bull market bull core assets.
Chinese economy has entered a new stage of transformation, L-shaped structure to stabilize, profitability of listed companies began a new upward cycle.
Under this background, China will drive economic transformation and upgrading Hong Kong stocks bull market, currently at the top of the bottom.
Recommend financial stocks leading, technology selection, consumption in the field of competitive core assets.

The following is the speech:

In this paper, “Hong Kong is a bull market bull core assets”, a keyword is a core asset is another big bull market.
If there is no fundamental support for the bull market, it is difficult to become big bull market, it can only be “pseudo-bull” or “bounce.”
Hong Kong’s economic fundamentals are dependent on mainland China, whether Chinese or Hong Kong stocks local shares are more and more integrated into the Chinese economy.
So, the big fundamentals of the local market to trend what is?
Is profitable core assets into a new cycle, and specifically includes the main Hong Kong stock index’s heavyweights, A shares of industry leading companies as well as Wall Street takes stock of leading companies, these companies are represented profitability has established a new up-cycle

The first part we will take more time to explore Hong Kong stocks this bull market fundamentals trend – new upward cycle profitability of listed companies.

The new up-cycle earnings, not the same as the new up-cycle economy, frankly, I do not agree with the Chinese economy started a new upward cycle, the definition is too on the new economic cycle
confusion, here is not started.

In recent years, I have always stressed that the Chinese economy has entered a new stage of transformation, leading to core assets fundamentals reversal.
Late last year, I first proposed the “Hong Kong stocks open a new bull market”, where as the first and most important reason, I did not put water south to the north, did not put the common market under the interconnection system innovation, I had the Chinese economy to a soft
landing, into the L-shaped stage, “horizontal”, the profitability of listed companies profit reversal, a new bull market as Hong Kong stocks the most important reason.
We judge whether it shall share leader, or a globally competitive company A shares or Hong Kong stock companies, their earnings will be accompanied by a new stage of China’s economic transformation and began to enter the reverse stage.
This year Chinese listed companies reported gratifying to see that I was a year ahead of the judgment has been verified.
Hong Kong stock index constituent stocks overall earnings growth, has been completely out of since 2009, continuing the downward phase, began to go up.

or now we need to focus on the issues discussed, the profitability of listed companies can not be sustained?
Is not a flash in the pan?
If the new economic cycle is falsified, profitability of listed companies up new cycle can continue to set up?

My answer is that Hong Kong investment, the most important thing is to be based on fundamentals, however, some people equate to cyclical fluctuations macroeconomic fundamentals is wrong, even if the new economic cycle falsified
, profitability of listed companies up new cycle will continue.
Our next detailed analysis:

First, we must accurately grasp the fundamentals, we must accurately grasp the main features of China’s economy.
What are the characteristics of China’s economy next stage is the probability?
I think it is progress while maintaining stability, transformation and upgrading, rather than the ups and downs, fluctuations in the economic cycle will weaken in the future, like the nineties and 2000s are no longer as big V.
The reason is simple, China is already the world’s second largest economy, in order to describe the economic life, China’s economy is now slowly entering middle age, no longer young, slowed heartbeat and pulse are normal, but middle-aged life
still wonderful, wonderful is that now China’s economic transformation is that structural changes, especially in the economic structure, optimize the industrial structure and the competitive structure of the industry is to enhance the efficiency and profitability of these changes bring new cycle.

future, if entangled in what is real GDP growth rate of 6%, 6.5% or 7%, investment will be more difficult to help.
The future, China will weaken the economic cycle, remain in the low level after the next growth, more robust operation.
China’s nominal GDP from a low of 2008 to the 2009-2010 crisis, “four trillion investment” pull about 20% of high-growth platform and then continued down to the fourth quarter of 2015, 6% low, at this stage big ups and downs
after that, the future nominal GDP will be around a long time fluctuated between 6% to 12%, real GDP hovering around 6%.
Weakening cyclical fluctuations, the impact on stock investment also weakened in the past that rely on large fluctuations in the economic cycle to predict the pattern will be very difficult to make money count.

Second, the accurate grasp of the fundamentals, the trend should be based on China’s economic transformation, to grasp the trend of the profitability of listed companies.
In fact, unconsciously China’s economic transformation trend more and more distinct, reflect these aspects.
Economic restructuring from 2013 after the final consumer has replaced capital formation, to become the strongest driving force driving GDP.
Industrial restructuring, from after 2014, the contribution of services to the tertiary industry growth significantly exceeded the secondary industry.
The bottom of the investment in manufacturing has stabilized, not 2008, “four trillion investment” soaring leads, but with economic clearing, winner-take-all, efficiency gains come slowly rise.
In addition, along with the supply side of the economic reforms leading to accelerated clearing of listed company’s balance sheet has improved significantly.

two weeks before the exchange roadshow in North America and overseas institutional investors views and practices of Chinese assets more positive on the whole, however, cautious and even pessimistic about the economy for China’s institutional investors are still a lot of people,
they lagged behind for information to track China’s economy, their problem is that the same old problems, such as over-reliance on investment and the economic and financial risks, debt China, Chinese real estate bubble problems and “ghost town” issue, the RMB exchange rate
I emphasize that transformation, transformation, transformation, transformation to solve the problem, resolve risks in development.

In fact, the relevant data from China and the fruits of economic restructuring can be seen in the chart, the L-shaped economic stabilization, structural optimization, enhance the competitiveness of leading companies.
Supply Restructuring the supply side reforms represented, and the need to upgrade consumption structure adjustment, accelerate the pace of economic clearing accelerate the survival of the fittest within the industry and between the industry, conducive to strong competition in the industry leading winner-take-all.

Whether Hong Kong stocks, A shares or concept stocks, most of them are China’s leading industry segments, benefit from the new phase of the transition, which, on the one hand the traditional industry leaders to benefit from the supply-side reforms, profit
reverse, such as machinery and equipment, cement, non-ferrous metals, iron and steel, coal supply from the side of reform in 2015 opened the market share continue to improve; and industry concentration in real estate continue to improve in the future the industry is not big cake
but the bread; on the other hand, new economic areas inside, too staged structure optimization, winner-take-era theme, the industry leader advantages over challengers is growing.

Internet is leading before saying “BAT” side by side, Baidu is now pulling away, saying now is to learn martial arts paper sold to A and T, Tencent and Alibaba advantage of growing, has
Baidu, Netease, Jingdong throw off.
The new Internet economy, including not only a leader, but also includes intelligent manufacturing new consumption patterns, as well as scientific and technological innovation-driven.
In addition, the financial sector also quietly improving competition occurs, leading the company’s performance growth began to emerge.
Over the past few years, financial liberalization, rapid issuance of insurance licenses, the rapid growth of risk Pond’s financial management, and sound operation of affordable insurance business but weaker than the growth performance of the leading companies in the industry.
With the “Insurance surname guarantees” to monitor the new ideas this year, China’s Ping An to start reporting the results significantly better than the industry.
So, the new earnings period is based on the economic transformation of the new stage, based on the core assets of competitiveness.

Third, an accurate grasp of the fundamentals, to distinguish between periodic noise caused by cyclical fluctuations.
Economic transformation and upgrading to bring new profit cycle is a long-term fundamentals of the main theme, however, is up this year cycle fluctuation noise; next year cycle fluctuations may be down noise.
This year real estate boom cycles than expected, superimposed synchronous recovery overseas, resulting in a “new cycle of economic illusion”, on improving profitability and long-term logic is icing on the cake.
But on the whole global economic recovery this year, the recovery is still weak, persistent lack of growth momentum, but this year fluctuations in the inventory cycle is the day a little better, a large base, a little weaker next year than this year, which is the noise after a period of weakness
Economic recovery this year cycle power superimposed with economies in transition, to bring Hong Kong stocks, A-share market is full of positive energy, and power cycle next year is likely to be negative energy.
It is important to accurately grasp the fundamentals and long-term trend was optimistic when the market consensus so do not be too optimistic when the blind; the market in the economic cycle pessimistic, do not panic, because the cyclical fluctuations just noise.

detailed analysis of this year and next periodic disturbance, on the one hand, expect net exports to China’s economy has sustained strong pull is unrealistic.
This year China’s economic contribution of net exports is expected over the release of the renminbi and the year before last year’s J-curve effect of depreciation, embrace the United States, the European economic recovery, especially in Europe than-expected economic recovery.
However, next year the second and third quarter, up difficult-than-expected US and European economies, the normalization of monetary policy, to bring economic pressure downward pressure on debt, the base effect.

On the other hand, Europe, America and China next year if the economic recovery can not be expected to continue over, does not require significant down, it will have a negative impact on the global equity asset prices.
Because, now global investors have a strong consensus forecast is that the “economic recovery is still weak, there is no inflation, low interest rate environment will exist over an extended period,” Therefore, “it is no brain concussion every buy” passive ETF
index tracking funds and scale of quantitative investment increasing, leading European and American stock market self-reinforcing, Diego high.
In such a case, next year if it continues to Trump’s New Deal, or just not up to expectations in line with expectations, economic, geopolitical, oil prices, changes in interest rates in Europe and America brought uncertainty will make the valuation is higher than the record high of Europe
the stock market has a negative impact.
This Hong Kong global valuation of depression is still just near misses, after defuse the risk-adjusted overseas, Hong Kong will further access to global capital configurable preferences.

Another important periodic disturbance factors, is expected this year real estate boom is over, and the regulation of real estate next year will reflect the effect.
Mainland this year to buy a house than to buy Hong Kong property stocks, property stocks are continuing this year, Societe Generale Securities offshore team key recommendation since the beginning of the year.
In fact, this year the housing stock’s performance and share price performance is large than expected, the reason is that-than-expected prosperity than-expected third and fourth tier cities real estate is super execution shantytowns.

The first two weeks I was in North America, overseas investors are still worried about the real estate concern “ghost town”, I said, at least now there is no ghost town, the country’s real estate market after 2015 will usher in a rapid rise
to shantytowns monetization as a starting point, the urbanization rate has started to further accelerate the upgrade, especially in recent years, a large number of high-speed rail construction, help Accumulate large urban agglomerations and the third and fourth tier cities real estate market
This round of real estate boom span of time than any round of real estate boom period after 2008 are more tenacity.

Even so, I still want to remind you to stay awake half the remaining half drunk.
This round of real estate boom, in essence, the household sector is a fiercely added leverage, debt, leverage also transferred to the hands of the people, together with the house from the hands of developers.
Maneuvers balance sheet to ease the real estate and banking systemic risk, and also why, next year for government regulation of real estate firm will be stronger, and economic phased down for tolerance is also stronger.
So, within the housing stock overall market, the first half of next year will come under pressure, so it should live in the moment, and there are positions on the rise and treasure, however, is not hindsight positions and want to participate in the housing stock market, the
It should be based on logic and long-term margin of safety to a selection.

Fourth, accurate grasp of the fundamentals to understand the regulation of industrial policy and financial regulatory policy will further lead to survival of the fittest, winner takes all become normalized, in favor of core assets profitability continued to improve in the next few years.
Why is the norm?
On the one hand, economic growth in low levels, industrial and financial policies will lead to economic cyclical frustrating, but difficult to change the volatility of GDP zigzag pattern, accordingly, various industries, including the cyclical fluctuations in the real estate industry will weaken, and
change from restructuring, transformation and upgrading, thus, survival of the fittest, winner takes all.
Then within the housing stock, for example, in the context of next year there is downward pressure on cyclical factors, the market will return to differentiation, the strong stronger and the normal logic, this year with the integrity of Hurricane Mengjin is different.

On the other hand, the financial regulatory environment, mobility environment is not the same as in 2012 and 2015.
Beginning in 2012, global liquidity is very loose, then there is a saying “there must be a dream, if achieved it” very fashionable, because then downward economic trend, the risk-free rate of return is also trend down, so
be able to tell a story, it is easy to get cheap money, epitaxial M & a in order to achieve leapfrog development.

But now, China’s economy has stabilized, a new stage in the transition government to do is to mitigate risks, improve efficiency, and therefore, the liquidity environment will not loose not tight, do not expect both to continue to turn on the water to achieve
the new economic cycle, not only do not worry repeat Japan’s 1990s simply rudely punctured the bubble of mistakes, large probability or optimal monetary policy choice is do our best to upgrade and improve the efficiency of providing relatively stable liquidity environment and policy expectations
so that, with time for space, we continue to digest the bubble, to solve the problem.
Like high valuation of growth stocks, high short-term valuation is problematic, but the choice sideways, waiting for the rapid growth of profits to resolve the valuation risk, a new stage of China’s economic transformation is also necessary to improve efficiency, financial policy, industrial
policy, environmental policy and supply-side reform and the reform of state-owned enterprises are expected to accelerate the optimization of the industry competitive environment conducive to efficiency improvement, conducive to industry leading enterprise performance continued to improve.

Fifth, an accurate grasp of the fundamentals, you can learn from history, a new phase of the current China’s economic transformation is more like the United States in the 1980’s, is the embryonic stage of a new cycle of prosperity.
America is a big boom nineties, the eighties and the US economy is slowing down after wandering the stage stairs, tepid inflation is lower than the seventies, higher than the sixties, also belong to the liquidity environment
US stock market, the S & P 500 index continued to outperform the Russell 2000 index of the 1980s, the industry leader in more competitive, performance and profitability of the share price performance is also stronger than the whole market, especially good for most small companies.
US stocks eighties, able to outperform the S & P 500 index of leading all industries, either because the use of scientific and technological innovation, enhance efficiency, to become globally competitive companies, such as GE; either take advantage of new business models
to meet the new demands of economic restructuring, such as McDonald’s and Wal-Mart.

and the United States in the 1980s similar to the Chinese market performance this year is a preview of core assets, is in line with the rise of a great company previewed a new era!
A-share market this year, more cattle than the CSI 300 and GEM is the industry leader, we selected the market value of the top three companies in each industry index compiled ran very best; Hong Kong stock market, representatives of leading companies of the Hang Seng Index was stronger
in the small cap index.
Future, based on the fundamentals of listed companies in China, based on the new cycle core assets profit up, whether it is Hong Kong stocks, A shares or stocks in which takes stock of various industry leaders, are worth carefully selected, and still is based on the long-term
be a good time to show strategic configuration.
China’s core asset bull market has only just begun.

The second part, the Hong Kong stock bull run that look ahead and predict, because of the limited speech time, I briefly some conclusions.

The first conclusion: the current Hong Kong stock market has been in the late first stage of the bull market will still shock up, however, increased turbulence.

Hong Kong stocks rose from last year’s 18,000 points to 28,000 points now, or is clearly in line with the definition of a bull market.
From a valuation point of view, the valuation of the Hang Seng Index also static in the past five years highs, while the index point is also near record highs region.

And I still believe that Hong Kong stocks bull market is still only at the late stages of the first, at the top of the bottom, can be seen as the first stage before the break 31,000 points, regarded as the bottom area.
From a valuation point of view, compared with the world, behind both the Hang Seng China Enterprises Index, or, both indicators are PE or PB valuation of depression; compared with the past three decades the Hong Kong stock valuation range, is still in
below the average.
More importantly, Hong Kong stocks gain new cycle has been established, the downward trend in performance since 2009 has been reversed.
Profit driven market trend is very clear this year, profitability continued to improve future core assets will continue to enhance Hong Kong stock market space.

The second conclusion: With the reform and innovation of the Hong Kong stock market, Hong Kong stocks new bull market may have interpreted as a super bull market.
Next, the Hong Kong stock valuations there is not likely to return to historical valuations over the area?
Even back to the 2000s valuations top?
However, more needs to see Hong Kong stock market conform to the trend of China’s economic transformation and upgrading of China’s transition to a new phase of innovation and growth more representative.
And it depends on the development of Hong Kong’s new financial center, really depends on institutional innovation and reform the Hong Kong stock market.
Most importantly, be able to buy good assets of A shares is not in Hong Kong stocks.

If Hong Kong is just the same assets cheaper than A shares, but no other advantage, then frankly, maybe 40,000 points is the limit of this round of the bull market of Hong Kong.
Because, according to the existing Hong Kong stocks leading companies, we estimate earnings in the coming years, and then superimposed a certain degree of recovery in the valuation of the index to measure the space, that this space.
Hong Kong stock market because they do not change the structure of industries and companies constituted, it is difficult to enhance the systemic average valuation.

If this round of the Hong Kong stock market is super bull market, investors need to consider that, in addition to fundamental factors, incremental funding the next phase, including once with Hong Kong leading the A-share valuation approaches
so, why the “North water” will continue to scale down south?
In addition, MSCI will be added to the index after the A shares, foreign investment if it continues to “water east to west,” Why not choose A-shares and Hong Kong stocks selected, it must be because of the unique advantages of Hong Kong stocks.

I think it’s a new bull market Hong Kong stocks are expected interpreted as super market, is optimistic about the new strategic positioning of Hong Kong’s status as an international financial center in the new stage of China’s economic transformation, it is to “all the way along the” National Strategy for services, a
Chinese capital bridgehead sea, as well as the Hong Kong stock market institutional innovation in order to meet the strategic positioning and produced.
In the end, Hong Kong’s capital market will adjust to the new economic and financial situation, and the formation Shanghai and Shenzhen do not have the advantage, that is, China’s money can buy good assets around the world in Hong Kong, or the funds in the world capable of
Hong Kong to buy the whole of China.
Otherwise, Hong Kong stocks if no new changes, everyone in Hong Kong to buy assets can buy A shares, A shares and there are so many “leek” and enjoy a premium valuation, it is difficult to get rid of Hong Kong being marginalized

Hong Kong institutional environment will change, I for 2018 is expected to launch innovative motherboard full of expectations, if successful, will attract more Hong Kong-core assets.
Property core assets, may reflect the level and nature of the bull market, it represents the core assets of China’s economic transformation and upgrading can drive super market.
Let me give an example, like the poor representation of A shares of China’s economic transformation was upgraded by 2005, continue to be marginalized; however, in 2006 with the Hong Kong representative of the leading companies return to A-share market, led A
shares 2006– super bull market in 2007.

Now and over the next few years, representatives of Chinese economic transformation and upgrading of the most dynamic areas that consumption upgrading and technological innovation, many of the leading companies in this field in the United States, and innovation will contribute to these leading motherboard companies
return to Hong Kong.
On the one hand, the strong consumption in China’s economy now demands a corresponding huge new consumer demand, 1.4 billion people, per capita GDP of $ 8123, per capita GDP east coast is $ 15,000 has crossed the middle-income trap, so to Internet
consumer consumption as the representative of the new new economy sustained high growth, however, leading companies are listed overseas, whether it is Ali, Baidu or learning and thinking, want to return to A-share short-term is difficult, but with innovative motherboard, ADR returned to Hong Kong
HDR release is possible.
On the other hand, emerging businesses related to China’s scientific and technological innovation are many innovative board help attract high-quality innovative enterprises listed on the Hong Kong stock market to achieve rapid play capital market advantage.

In addition to China’s core assets, Hong Kong’s innovative motherboard is expected to attract overseas good company to listing in Hong Kong, thus, truly is “along the way” service of an international financial center, it will benefit from the re-allocation of global funds
For example, to attract “all the way along the” relevant area of ‚Äč‚Äčleading companies, such as Saudi Aramco, even in Europe and America to Hong Kong-listed company representative.
So, the Hong Kong stock market gave rise to a new location, it will become China’s international board in the true sense, but also the domestic financial center irreplaceable role.

So, the next few years the Hong Kong stock market will be more benefit from feng shui global capital allocation circle, the global allocation of funds in the first half of 2016, this figure for everyone to read, emerging and developed markets relative configuration
the strength of the relationship, about 5–7 years there is a cycle of the past five years, emerging market funds outflow, the flow of the developed markets.
Now a turning point, the next few years, with the upgrading of China’s economic transformation, along with “all the way along,” the advance, as the reforms, we believe that, right now Chinese assets to Hong Kong stocks led the MSCI Emerging Markets Index which their weights
continued to improve, rising from 30%, and may even reach 50%.
A few years later, global investors will find the MSCI market index, DM mainly the United States-led market index, EM Emerging Markets Index is a leading Chinese assets.
Now more than 80 percent of global wealth distribution in the US and European markets, and the future capital of the world is, the world of beauty, and now the world capital allocation to China is low with severe, will continue to increase in the future.
Therefore, as the cheapest and representatives of economic innovation and upgrading of Hong Kong, will continue to benefit from the “water east to west.”

The second part be a summary, the reform of the institutional environment in Hong Kong, innovation, Hong Kong stock market will help usher in the real bull market.
Hong Kong stocks from last year I made a new bull market so far, the Hong Kong stock bull stellar performance, but I still define this is just the first phase of the market, even only from the volume point of view is regarded as marginalized bull, up to now Hong Kong
turnover is still only 1/10 a shares.
The future, as Hong Kong stocks innovation system environment, Hong Kong’s capital market will become truly common market China’s stock market has become with Shanghai, turnover deep exchanges will be closer, so the Hong Kong capital market may have more room for development.

The last part, on investment opportunities, due to time constraints, I say briefly, I want to emphasize most is to find Chinese investment theme core assets globally competitive.

still is a strategic opportunity to configure the layout of the core assets.
Hong Kong stocks are still cheap; October A + H companies released three quarterly, leading enhance profitability, is expected to drive the market.
Continue to focus on financial stocks leading recommendation, selection of technology, consumption in the field of competitive core assets.
First, from the perspective of short-term arrangement, insurance and banking leader, in a few months more to look forward to future performance.
Current Hong Kong Chinese banks fell to 0.93 times the PB, engineering, agriculture, in construction line with the spread of A shares rose to more than 20%; PEV-funded insurance stocks also fell more.
Fundamentals determine the trend reversal, poor quality big firms benefit from the rate stabilization and net interest margin bottomed out; the insurance benefit from the leading high-growth type of insurance protection and improvement of the competitive landscape of the industry.
Secondly, based on the long-term, we continue to be optimistic big opportunity in the field of consumption in the field of innovation and manufacturing technology, promising emerging consumer information consumer (electronics, mobile games, Internet consumption), education, medicine and health care, leisure and entertainment, fine
for automotive, home appliances, home, food and beverage and so on Chinese traditional consumer industry, which has a leading global competitiveness.

Finally, I hope that we can in this round of the Hong Kong stock market, the big trend to grasp the core assets profitability trend of the new cycle.
Fluctuation cycle is performed for the reverse thinking, optimistic time when we are consistent and appropriate risk controls to make rational, but fears downward cycle time, perhaps in the first half of next year, we have to be a little more brave, in order to fully enjoy the core of Hong Kong
asset bull market.

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