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Buy stocks and corporate debt, take profit in government bonds and don’t worry about the yuan. That’s the 2019 China markets advice from two seasoned pros who (mostly) got it right this year.
Wednesday 05, December 2018
(Bloomberg)--Jonathan Garner, a Morgan Stanley strategist who called the bear market in China, says investors should snap up cheap shares after Beijing and Washington agreed to hit pause on their trade dispute, adding that there’s “too much cynicism” about a potential agreement. BNP Paribas Asset Management’s Jean-Charles Sambor, whose year-long bullish stance on government bonds proved profitable, is reducing duration risk and hunting for value in the country’s battered credit market.
The scale of this year’s confidence crisis in China’s markets took many by surprise. Stocks were meant to enjoy their big debut on the global stage and a resilient economy would be strong enough to withstand deleveraging, thereby extending a rout in sovereign debt. Instead, the opposite happened: the biggest loss of value in a decade for stocks, the best government-bond rally in the world and a steep currency depreciation.
Supportive steps by policy makers to shore up growth will likely reward investors with a more aggressive stance, according to Sambor.
“There’s a lot of negativity in China, but there’s still a disconnect between equity and bond investors on stimulus,” said Sambor, who helps oversee $4.5 billion in emerging-market debt. “The rates market has priced in more support while the equity market seems to be challenging this. That sets things up for a risk-on rotation in 2019.”
Both Sambor and Garner are expecting the yuan to be relatively stable next year, which would help risk appetite.
Morgan Stanley strategists say higher equity valuations are justified in China if the trade dispute with the U.S. de-escalates. They say additional fiscal stimulus measures out of Beijing would also lift sentiment, boosting domestic demand and translating into better sales and earnings growth.
“We have a fairly high degree of confidence that in the second half of next year, the year-on-year growth numbers will be accelerating,” Morgan Stanley’s Garner said by phone in Hong Kong.
Their year-end target of 3,650 for the CSI 300 Index implies a 12 per cent rally from Wednesday’s close, better than the 7.4 per cent gain they predict for the MSCI China Index.
Garner did initially predict 2018 would be a good year for stocks in Greater China, before saying in January that Hong Kong’s record-breaking rally had made that market overheated. He turned more negative on A shares in April, when stocks had already started to slump.
BNP Paribas Asset says stick to short-maturity policy bank bonds and wait for onshore credit spreads to widen further before jumping in. They’re also going against the crowd who are betting that more monetary and fiscal easing will sustain China’s government bond rally: for BNP’s Sambor, it’s more likely to trigger a rotation out of havens and into A shares.
“All the boxes were ticked for a significant rally in the onshore rates market this year,” said Sambor. “Now we think most of it has been priced in.”
While the yuan just staged its biggest two-day gain in more than a decade, the two strategists who came closest to predicting the currency’s level at this stage of 2018 agree the latest rally won’t last. Ken Cheung of Mizuho Bank Ltd. forecasts the yuan will be at 6.8 to the dollar at the end of next year and Hao Zhou of Commerzbank AG expects it to be at 6.95. The currency traded at 6.86 to the dollar Wednesday.
“The trade talk may provide some relief, but the yuan is still under pressure due to an economic slowdown, a shrinking current-account surplus and loosening monetary policy,” said Commerzbank’s Zhou.