Review of the market trend

Benefiting from the stabilization of the external market and the continued improvement of the domestic market environment, the overseas Chinese stock market rebounded again last week. Among them, the Hang Seng Technology Index rose 4.1 per cent last week, supported by policy support for the digital economy and the financial technology industry. Overall, the MSCI China index rose 4.4 per cent, while the Hang Seng China Enterprises Index and the Hang Seng Index rose 3.6 per cent and 3.1 per cent respectively. In the sector, health care, optional consumption and essential consumption led the increase, rising 11.9%, 6.6% and 4.9%, respectively, while the energy and raw materials sectors underperformed, falling 4.7% and 2.1%, respectively.

Market prospect

After a brief correction in the previous week, the overseas Chinese stock market regained upward momentum last week. From the perspective of the external environment, overseas markets stabilized and rebounded last week, with the S & P 500 and NASDAQ up 6.4% and 7.5% respectively, superimposed by the strong performance of the A-share market, which provided a good external environment for the overseas Chinese stock market. In addition, the Hong Kong stock growth sector continued to outperform, in line with the performance of the growth sector in the A-share and US stock markets.

Overseas, the market sell-off has eased somewhat, but the follow-up pressure is still worth paying attention to. External factors may still be the main source of volatility for Hong Kong stocks in the third quarter.. After the previous sell-off, the US stock market rebounded steadily last week, which was not entirely surprising given the previous panic and the apparent overselling of the market.

However, the pressure on the US stock market has not been fully released, especially given some of the uncertainties that will still be faced in the third quarter.。

For example, the Fed is still likely to raise interest rates by 75 basis points in July and 50 basis points in September. Inflation is likely to remain high for some time to come due to supply constraints before a new high base begins in September. At the latest congressional hearing, Federal Reserve Chairman Powell reaffirmed the Fed's firm commitment to curbing inflation. We believe that this statement highlights the relatively tight policy position that remains until the Fed completes its goal of raising benchmark interest rates to significantly above neutral levels, which will continue until at least the third quarter on the current path of rate hikes.

In addition, given the sudden tightening of the policy path and rising recession fears, this partly explains why commodity prices and 10-year Treasury yields have both fallen. Around July to August, US and Hong Kong stocks will usher in two quarterly or semi-annual reports. We expect investors to take this opportunity to assess economic growth and the sustainability of the recent rebound.

Therefore, the possibility of market volatility cannot be completely ruled out, but given the reverse of the Sino-US cycle, low valuations of Hong Kong stocks and continued southward capital inflows, we believe that external fluctuations may not completely reverse the upward trend of Hong Kong stocks.

On the domestic side, positive factors continue to emerge, further supporting the market and investment sentiment.Shanghai announced that it had won the war on prevention and control of the epidemic, and Beijing also gradually lifted its closure and control measures. At the same time, we expect more favorable policies to be introduced to support economic growth. Minister of Finance Liu Kun pointed out that the Ministry of Finance should strengthen macro-policy regulation, plan incremental policy tools, arrange ahead of time, speed up the pace, and increase strength in a timely manner.

In addition, the Hong Kong Special Administrative region will celebrate the 25th anniversary of its return to the motherland next week, and Chinese President Xi Jinping will attend a meeting to celebrate the 25th anniversary of Hong Kong's return to the motherland. In order to support the development of the Hong Kong Special Administrative region and the Hong Kong market, we cannot rule out the possibility that some favorable policies will be introduced at that time.

However, it should be noted that, considering that more gains have been accumulated so far, and as investors turn their focus to the actual effect of stable growth policies,We think the potential profit-taking pressure is also worthy of follow-up attention.。

At the policy and regulatory level, the Securities Regulatory Commission formally issued a notice on the inclusion of traded open-end funds in the relevant arrangements for interconnection, proposing that ETF should be formally included in interconnection. We believe that the ETF interconnection between the mainland and Hong Kong markets is expected to promote financial market integration and may further improve liquidity in the long run.

At the same time, the 26th meeting of the Central Committee for comprehensively deepening Reform examined and adopted the work Plan for strengthening Enterprise Supervision of large payment platforms to promote the healthy Development of payment and Financial Science and Technology.

In addition, coupled with the trend of marginal relaxation of the regulatory position of the Internet and online games, we believe that the possibility of intensive introduction of large-scale more-than-expected regulatory policies should be small.

As the CSRC drafted the interim regulations on the Management of Public offering of Securities Investment funds for personal Pension Investment (draft for soliciting opinions), the personal pension system has entered the implementation stage and is expected to bring new long-term funds to the capital market in the future.

Looking forward, we believe that there is still room for repair in Hong Kong stocks from the current valuation level.Therefore, we expect that Hong Kong stocks will still have relative resilience and the positive judgment is still valid.But a more obvious and sustained upside will depend on improved growth and earnings.

At the same time, given the continuing uncertainty and profit-taking pressure in the market,We also remind investors to pay attention to the possibility of potential fluctuations。

Variables worthy of close attention in the future include: 1) policy support and its impact on economic growth; 2) fluctuations in the US stock market; and 3) trends in Sino-US relations and regulatory cooperation. In terms of plate configuration, considering the current environment, we thinkHigh dividend yield target and high quality growth stocksIt's still a better choice.

Specifically, the main logic that underpins our point of view and the factors we need to pay attention to last week include:

1) the inclusion of ETF into interconnection is another step forward.

On Friday, the Securities Regulatory Commission formally issued a notice on the inclusion of traded open-end funds in relevant arrangements for interconnection, proposing that ETF should be formally included in interconnection, so that mainland and Hong Kong investors can buy and sell shares listed on each other's exchanges and shares of ETF funds through local securities companies or brokers.

In our previously released report "CICC: further expansion of interconnection into ETF", we pointed out that the inclusion of ETF into interconnection is not only conducive to enriching the range of trading products and providing more convenience for foreign investment in China's capital market, but also of great significance in promoting the integration of the capital markets of the two places and the further opening up of China's capital market. Shanghai Stock Exchange, Shenzhen Stock Exchange and China Clearing have respectively formulated or revised relevant business rules, and the official launch time will be announced separately.

Figure 5: list of northbound ETF funds that may be eligible based on the existing inclusion criteria for ETF interconnection

2) China promotes the standardized and healthy development of the financial technology industry to better serve the development of the real economy.

On June 22, the 26th meeting of the Central Committee for comprehensively deepening Reform examined and adopted the work Plan for strengthening Enterprise Supervision of large-scale payment platforms to promote the healthy Development of payment and Financial Science and Technology, pointing out the direction of development and rectification for large-scale payment platforms. We believe that this will help financial regulators to be more targeted in enforcing laws and regulations.

3) the CSRC intends to issue new rules to regulate the business of individual pension investment public funds.

Two months after the General Office of the State Council issued the opinions on promoting the Development of personal Pensions, the CSRC drafted the interim provisions on the Administration of Public offering of Securities Investment funds for personal Pension Investment (draft for soliciting opinions) on Friday (hereinafter referred to as the interim provisions) to solicit opinions from the public.

The interim provisions plan to give priority to the inclusion of pension target funds with a size of no less than 50 million yuan at the end of the last four quarters. Since then, after the personal pension system has been fully launched, it is proposed to gradually include stable investment style, clear investment strategy, good long-term performance and sound operation. Stock funds, mixed funds, bond funds, funds in funds and other funds prescribed by the China Securities Regulatory Commission that are suitable for long-term investment of individual pensions.

We believe that the individual pension system is expected to promote the asset allocation of Chinese households from real estate and deposits to financial assets, thereby bringing new long-term funds to the capital market.

4) the momentum of southbound capital inflows remains unchanged, and the scale of overseas capital outflows is rising.

Mainland investors are enthusiastic about investing in the Hong Kong stock market through the Hong Kong Stock Connect, which flowed into the Hong Kong market for five consecutive trading days last week. Specifically, southbound capital inflows averaged HK $1.4 billion a day last week, down from HK $3.9 billion the previous week. Meanwhile, overseas ETF funds flowed a total of $331 million out of the Hong Kong stock market last week, while overseas active funds also flowed out of the Hong Kong stock market last week, totaling $284 million. Overall, data from EPFR showed that a total of $615 million of overseas capital flowed out of the overseas Chinese stock market last week.

Investment suggestion

While there may be profit-taking and consolidation pressures in the market, we believe that positive policies, low valuations and continued southbound capital inflows are expected to continue to support the market.We believe that potential volatility is expected to lead to better opportunities for relayout.

In terms of investment advice, in view of the current macro environment, we believe thatSectors where there is certainty (certainty brought by dividend payments or predictable operating cash flow) will still be a reasonable choice.Therefore, we recommendHigh dividend targetSuch as banks, some utilities and energy sectors. In addition, we also recommend that attention be paid to those where there is a discount in valuation and the regulatory environment is gradually improving.High quality growth plateSuch as cars, medical devices, parts of the Internet and the consumer sector.

Focus on events

1) China's economic growth and policy changes; 2) geopolitical situation; 3) epidemic changes; 4) Sino-US relations.