China’s A-Share Equity Market Seeking Direction: UBS’s Liu

published on August 3, 2020

The equity market on the asia asia equity market feels it feels a bit tired what do you think near-term direction um i think we're sort of um in a trading range for now and it's seeking direction

Although in a way it's a good thing because if it goes up very strongly then it would have more reasons for particularly offshore investors to settle down

And move on yeah and i think global investors are always wary of a very fast ball turning into a beer a bear you know collapse okay but i think

Right uh now part of your thesis right now is start looking at cyclicals and it's it's it's it's a recommendation i have to say that's been brought up by a lot of our guests when you look at china say look

At cyclical it's about time the economy is recovering is it broadly cyclical is that is that top down or is it still bottom up uh it's both top down and bottom up so in our model portfolio we turned more

Positive since early july and right now we're overweight consumption and cyclicals and within cyclicals it's construction machinery building materials and gold and copper

So we're seeing positive demand driving revenue and margins and in some cases gaining market share for construction machinery and building materials when it's tom here in beijing when we

Last spoke to you in february you are overweight internet stocks tech stocks education automation are you taking any money out of those stocks now and adding those to the cyclicals

That you just listed or are you adding and keeping that tech position um we trimmed a bit in internet um and we are out of the third tier internet names

Uh although admittedly there could be some privatization opportunities but that's hard to call and we allocated some of that money um into cyclicals because the earnings and

Growth are going to be ahead of expectations and some of the cyclical names come from very fragmented sectors that the leaders can consolidate market share

And also do a little bit of import substitution so is this largely then a focus on soes then do you try and avoid the small caps in the cyclical space that's a very good question i think the

Provincial local soes often have equity incentives and we found restricted shares and stock options tend to be quite useful for lifting returns to the shareholders

But what's been very difficult is to be very positive on central government soes so we do have some small caps mid caps encyclicals it's very much bottom up and wendy to follow up on that um i'm

Looking that's well i'm looking at you i noticed you guys did some studies here back testing part of that i imagine on the the sort of investment strategy that

Worked during the gfc and separately during the trade war as well and i guess to tom's point what did you guys find large or small cap and what does that tell you about how to

Invest right now yeah thank you for highlighting that uh when we did the comparison on gfc and looked at how value uh cyclical and then growth performed gross beat the other two

Yeah by a mile so people own chinese equities for growth so that's a pretty clear conclusion and from the study of 24 months 22 months trading pattern since april 2018 during escalation of us

China attention then a truth and a standoff and etc what we found is that the kind of stocks that can outperform tend to be mid cap with very strong earnings trajectory and they

Will go up independent of what the bankroll backdrop is other than that the large cap tend to swing with the risk on and risk off so during the risk on period people will

Buy tech semi tech include hardware software and consumer discretionary and then during the risk off people will go for lower beta in staples

Um insurance and some defensive etc and wendy you highlighted the importance of a strong balance sheet there we've been talking about liquidity conditions

Here in china concerns from our own team at bloomberg economics that they need to be eased where are we when you look at the liquidity conditions where are we when it comes to the default cycle here in

China i think the default cycle is still going up and i think the the difficulty in looking at the liquidity condition or the the signals is that there's so many

Signals of interest rate right but judging at what the regulators have done so far this year is that they're making small but quick adjustment so that there's enough liquidity now

We think because of the default conditions there could be kitchen sink quarters yeah and i think this is what investors are waiting to see during the interim results

They're also likely more consolidation privatization and restructuring opportunities so we do see some strategic buyers stepping up as a result

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