Hang Seng Investment 3Q15.pdf

3Q 2015 Investment Outlook

7 Jul 2015

Page 1, Total 24 Pages

Global Markets The year to date performance for global equity market was rather flattish, as the Greek debt woes and Fed rate normalization further kept investors staying risk-averse, especially during the past quarter. We expect the fear of financial market turmoil caused by Greek politics and US rate move will gradually fade by the end of 3Q, and suggest investors to re-position the asset allocation in preparation for the risk appetite to come back in 4Q. HK/China Equity Markets On HK/China stock market, It’s expected that the Chinese government will further support the stock market and the A share market could resume its order and stabilize very soon, but investors should realize that any stock market couldn’t deviate from its economic fundamentals for long. Looking at the economic front, our base case scenario is that China’s growth has already reached a short-term cyclical growth bottom. If China can achieve a mild growth rebound in 2H, we will see stock market regain the strength, especially the cyclical H shares.

Bond Markets On fixed income market, worries over deflation risks in the Eurozone have diminished after the ECB launched its bond-buying program in March. Current concerns on Grexit have pushed the US benchmark yield lower, but the event is expected to fade sooner than later, in our view. Investors are suggested to diversify the portfolio and reduce overconcentration on dollar bonds. We like offshore RMB bonds for yields and we anticipate a relatively stable RMB exchange rate.

Forex Markets On FX, we are bullish on USDJPY in 2H15. There could be a new wave of market expectation on BOJ to do more quantitative easing for trade and inflation to rise later on this year. Coupled with the US rate hike ahead and further widening of the US-Japan interest rate differential, we expect the USDJPY to enter into a new trading range and our year-end target is 128.

INVESTMENT OUTLOOK

Third Quarter 2003

Internal Use Only

JULY 2003


7 Jul 2015


Executive Summary 3

Equities

US 5

Emerging Markets (EM) 7

Europe 10

China / Hong Kong 12

Japan 15

Global Bond Market 17

Currencies

AUD GBP

19 20

JPY

21

EUR

22

CO

NTE

NTS


7 Jul 2015


EXECUTIVE SUMMARY Investment Analysis

Asset Class 3Q 2015

US equities =/+

European equities +

Japanese equities =/+

Hong Kong China equities +

Emerging market equities =

DM Corporate Bonds =/-

EM Sovereign bonds =

Asian bonds =/+

Commodity currencies =

Gold =

“Red” means changes have been made recently

Symbol representation:

=/+ Neutral with a Positive bias

=/- Neutral with a Negative bias

+ Positive

- Negative

= Neutral

Greek debt woes and Fed rate normalization

further kept investors staying risk-averse,

especially during the past quarter. We expect

the fear of financial market turmoil caused by

Greek politics and US rate move will gradually

fade by the end of 3Q, and suggest investors to

re-position the asset allocation in preparation for

the risk appetite to come back in 4Q.

On HK/China stock market, It’s expected that

the Chinese government will further support the

stock market and the A share market could

resume its order and stabilize very soon. If

China can achieve a mild growth rebound in 2H,

we will see stock market regain the strength,

especially the cyclical H shares.

Current concerns on Grexit have pushed the US

benchmark yield lower, but the event is

expected to fade sooner than later, in our view.

Investors are suggested to diversify the portfolio

and reduce overconcentration on dollar bonds.

We like offshore RMB bonds for yields and we

anticipate a relatively stable RMB.

On FX, we are bullish on USDJPY in 2H15.

There could be a new wave of market

expectation on BOJ to do more quantitative

easing for trade and inflation to rise later on this

year. Coupled with the US rate hike ahead and

further widening of the US-Japan interest rate

differential, we expect the USDJPY to enter into

a new trading range and our year-end target is

128.

The year to date performance for global equity market was rather flattish as the global stocks

valuation have already stretched since the end of last year, while the Greek debt woes and Fed

rate normalization further kept investors staying risk-averse, especially during the past quarter. We

expect the fear of financial market turmoil caused by Greek politics and US rate move will

gradually fade by the end of 3Q, and suggest investors to re-position the asset allocation in

preparation for the risk appetite to come back in 4Q. We do not assume the Greece debt

negotiation will turn into a replay of the Euro debt crisis in 2012 and we reckon the chance is that

ECB would continue to support Greece as a member of Eurozone. Even if Greece will eventually

leave the Eurozone, we expect see an orderly exit and will not result in a market crisis. In our view,

the more near-term threat to risk assets would come from the imminent Fed rate hikes, especially

on the emerging market stocks and emerging market FX where the volatility is higher. After such a

long period of easy money and close to zero interest rate in the financial market, it is difficult to find

anecdotal evidence to predict what will happen when Fed begins the rate normalization. There is


7 Jul 2015


likely another risk-off event to come during the time of uncertainty in 2H15, but we think investors

will eventually want to add on risks as the global economy recovers further. The developed market

equities are likely to be more resilient when the Fed tightens the rate as there is more growth

certainty in both their economy and the corporate earnings relative to emerging market, in our

view.

China equities market fell off sharply in June on leveraging control and government’s intention to

prevent market bubbles and bank bad debts. The deleveraging has triggered continuous sell off in

the past few weeks and most over-leveraged umbrella trusts have disappeared by now. It seems

the Chinese government will come back to support the market to prevent it from crashing further.

We hope the A share market could resume its order and stabilize very soon. The bottom-line is

investors should know any stock market couldn’t deviate from its economic fundamentals for long.

Looking at the economic front, our base case scenario is that China’s growth has already reached

a short-term cyclical growth bottom. Both the FAI and other leading indicators such as PMI

remained weak year to date. With a few rate cuts and RRR cuts, as well as local government’s

bank debt swap to municipal bonds program, we feel the monetary condition in Mainland is

becoming rather accommodative. Going forward we are looking for signs of growth stabilization,

i.e. further pick up of the property transaction volumes, followed by an increased land sales and

floor starts, plus more infrastructure investment on fiscal policy. If China can achieve a mild growth

rebound in 2H15, we will see stock market regain the strength, especially the cyclical H shares.

We remain our preference on H shares over A shares in 3Q mainly due to valuation and our

confidence in market liquidity in Hong Kong.

On fixed income, the US government bonds have had their biggest quarterly selloff since

December 2013, hurt by an improving US economic outlook and the Fed’s pending shift into

higher interest rates. The benchmark 10-year rate has climbed from 1.93% at the end of March to

2.35% end of June, marking the first quarterly loss since the final quarter of 2013. Economic

indicators in employment and consumer spending over the past few months have suggested that

the US economy is strengthening after a shallow contraction during the first three months of the

year. Worries over deflation risks in the eurozone, which were prevalent earlier this year, have

diminished after the European Central Bank launched its bond-buying program in March. Current

concerns on Grexit have temporarily pushed the US benchmark yield lower, but the event is

expected to fade sooner than later, in our view. Investors are suggested to diversify the portfolio

and reduce overconcentration on dollar bonds. We like offshore RMB bonds for yields and for

Chinese economic rebound in 2H and we anticipate a relatively stable RMB exchange rate.

On FX, we are bullish on USDJPY in 2H15. Japan's trade deficit widened in recent months, and

this could be a warning signal that current yen exchange is not weak enough to support the foreign

trade. Moreover, Japanese consumer price index remained relatively low this year, leaving some

doubts on whether the pickup of inflation has been as fast as BOJ has expected. There has been

an increased market expectation on BOJ to do more quantitative easing for trade and inflation to

rise. Coupled with the US rate hike ahead and further widening of the US-Japan interest rate

differential, we expect the USDJPY to enter into a new trading range and our year-end target is

128.


7 Jul 2015


12-Month Performance

──── S&P 500 Index

S&P 500 Index Data

Market cap (USD) 18.9 trillion

52-week Hi / Lo 2,131/1,862

3-Mth Total Return -0.36%

Y-T-D Total Return 0.48 %

50 / 250 Mov.Avg. 2,104/2,096

2015 Est. Yield 2.1%

2014 Estimated P/E 18.3x


2015 Estimated P/B 2.69x

Source: Bloomberg L.P.

As of 06/30/2015

UNITED STATES

INVESTMENT SUMMARY

- US stocks have managed to move higher so far this year, but have

been trading in narrow-range. Historically, narrow ranges have typically

broken to the upside, but volatility is expected.

- US economic data has improved since the weak first quarter, allowing

the Fed to “normalize” interest rate at a steady pace, without yet having

to react to inflationary pressures.

U.S. stocks have managed to move higher in the second quarter this

year- boosted by improving economic data from job market and retail sales,

and robust M&A news from corporates. Despite robust markets, all major

indices have been trading in narrow-range. Historically, narrow ranges had

chances of breaking to the upside, but also had risk of correction.

The U.S. economy data proved to get rid of sluggishness reflected in

the first quarter- Economic data have improved in second quarter after the

weak first quarter. There is hope for a pickup in the U.S. economy, as

shown by improving labor market, housing, retail sales and business

activities. The retail sales rebounded in May and June. Energy prices are

substantially lower than they were last summer, unemployment is

improving, interest rates remain low, and wages are starting to rise, which

are all supportive an improving economy. Housing market is also gathering

steam, with the National Association of Homebuilders (NAHB) Index rising

to 59, while building permits, a gauge of future activity, rose

11.8%. Meanwhile, existing home sales rose 5.1%, while new home sales

gained 2.2%. The only setback is manufacturing sector, which appears to

be struggling because of the strong dollar.

September seems to be the most likely the time for interest rate hike-

The U.S. Federal Reserve (Fed) has been paving ways to prepare

investors for interest rate hike before the end of this year. As the labor

market has been improving and wage growth should be progressively

improving, we see September a likely time for a “lift off” unless there were

surprises. The surprises could include inflation unexpectedly accelerates in

the near term, potential for a strong negative market of another euro crisis

triggered by Greece, or major shock of economic slow-down from China.

U.S. equity market to expect volatility but to the upside- The Fed has

made it clear of its plans to move slowly toward a more normal policy

stance during the last few FOMC meetings. Therefore some but not too

much volatility is expected in the market. History shows that the stock

market performs substantially better during a slow tightening cycle than a

fast one. The forward P/E for the S&P 500 is about 16.8x, which is higher

than the 5-year average of 13.8x and also above the 10-year average of

14.1x. Since valuations are a bit stretched, we therefore expect a volatile

but positive U.S. equity market toward upside.


7 Jul 2015


Sector Outlooks Consumer discretionary (Neutral) We are a bit cautious on the consumer discretionary sector. The sector has been doing well since 4Q14, and we do see valuations are particularly attractive now. A large part of expected growth in 2H15 has already priced in the share prices. As the Fed will raise rates later this year, consumer discretionary shares historically are poor performers during tightening cycles. Healthcare / Biotech (Overweight) Having gone through a volatile quarter, we upgraded our view to overweigh on the sector. The performance of healthcare hit all-time relative highs and outpaced the S&P 500 year-to-date. The sector’s market cap weight in the S&P 500 has grown above 15%, as health reform which expand revenue and spending, and also due to the growth of Biotech. The U.S. Supreme Court's announced ruling (King vs Burwell) in regards to the legality of health-insurance subsidies favoring Obamacare is expected to give a boost to healthcare sector, with hospitals, and insurers are the most obvious benefactors of the law. We continue to like biotech as biotech companies are more levered to new product launches. Rising equity markets have helped to increase investor risk appetite, which is a key factor for the performance of the sector, especially the smaller cap names. Also M&A activities will continue serve as catalysts. Technology (Overweight) The long term growth drivers for the technology sector, which include structural growth, M&A and reasonable valuations, remain intact. Technology companies remain attractive with their strong cash position and less sensitive to movement of oil prices and interest rates. We preferred equities of innovators, i.e, internet of everything, big data, and internet security, as we expect them to benefit most from IT spending, while some may become M&A targets. We also prefer the leading tech giants, like Apple (APPL US) and Facebook (FB US), as their existing businesses are still doing well and they continue to adapt to new challenges and/or continue to return capital to shareholders. In a nutshell, big data, cloud computing, internet of things, mobile internet and social media will be the areas for future growth. Financials (Overweight) The US banking sector should benefit from the recent results that all US bank pass the stress in 1Q 2015. Most US banks are now allowed to start paying out more for dividends and/or buybacks. Financial sector has historically outperformed prior to a first Fed rate hike, as NIM is expected to expand from growing loan growth. Most U.S. banks have substantial amount of short-term asset which will likely yield higher coupons after the rate hikes. We therefore rasied our rating on Financials to Overweight. Utilities (Underweight) In contrast to the discretionary sector, these two sectors are usually considered defensive as they sell products that are purchased regardless of the market conditions. Utilities are particularly sensitive, as they correlate positively to energy prices. The average utility remains expensive at 1.7x price to book and 1.6x price to sales. We are starting to become cautious considering the Fed may be close to a rate hike cycle. Risk Considerations: 1) uneven economic growth in Europe and the BRIC nations, 2) change in federal budget levels in the U.S., 3) oil price volatility and 4) geopolitical threats in the Mideast. 5) the U.S. interest rate hikes earlier than market expected.


7 Jul 2015



──── MSCI Emerging Index

MSCI Emerging Index Data

Market cap (USD) 7.7 trillion

52-week Hi / Lo 1,104/906


Y-T-D Total Return -1.35%

50 / 250 Mov.Avg. 1006/1,000






As of 06/30/2015

EMERGING MARKETS (EMS)

INVESTMENT SUMMARY

- FED would start tightening soon

- Taiwan & Korea were the winners during and after the Taper Tantrum

- Greek debt crisis are not expected to have significant impact to

emerging market

- Earnings in EM were revised downward in Q2

- China, India, Korea & Taiwan are our top picks in EM markets FED tightening Federal Reserve chairwoman Janet Yellen said she expects interest rate hike this year, after more than six years of extremely low interest rate. As the Fed moves closer to raise interest rate in the U.S., many are asking how the emerging markets will be affected. Let’s be reminded that in two years from now, when the then Fed Chairman Ben Bernanke first mentioned the QE would be 'tapered' later that year, prompting a reversal capital flow to emerging markets. Emerging market equities down 17%, while Asia was also hit as hardly as elsewhere in emerging markets. In the last two years, some countries improve their financial situation while some did not. We believe Singapore, Korea and Taiwan were viewed as more defensive among emerging markets. Fund Flow during and after the Taper Tantrum In the summer of 2013, only US$38bn cash outflow from Asia equity and debt markets, which were only 10% of total inflow to the markets since 2009. After the tapering tantrum, there have been significant new inflows into Asia (ex-China) markets, with cumulative portfolio purchase of Asia (ex-China) assets standing now at $490bn. Just three markets, India, Korea and Taiwan, have accounted for over 100% of all the offshore net flows into Asia (ex-China) equity. Taiwan and Korea have improving current account and low degree of external vulnerabilities. We believe these two countries could out-perform others during US monetary tightening. Greece accident impact to emerging market We believe the environment is different to the pernicious market contagion observed in 2011-2011 due to various support mechanisms (such as the EFSF/ESM, LTROs & QE). With little exposure to Greek asset, the contagion risk from Greece to emerging asset has been limited. We believe any sell-off in the wake of Greece accident would be relatively short-lived, and likely a buying opportunity for investors. Earnings revision According to the IBES's estimation, emerging markets generally experienced earning downgrade in the past 3 months. Brazil suffered the most with 2015 & 2016 EPS revised down by 16.6% and 8.6% respectively. Only a few countries recorded upward revision, Korea is the only market with both positive earnings growth forecast and positive earning revision.


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Market Outlook India (Overweight) India stock market suffered in the 2nd quarter due to expectation of poor monsoon, behind progress of economic reforms and earning downward revision. However, we believe India could outperform others during the 3rd quarter. Up to June, monsoon has been on progress so far, which reduced the worries of rising food price. Market expects India could further cut the policy rate due to inflation is still manageable. Starting from July, the Monsoon Session of parliament would be held. A number of important economic reforms could be passed, such as Goods and Services Tax (GST), land acquisition bill and labor reforms. We believe passage of those reforms could be the coming catalyst, we therefore maintain overweight Indian equity market. Korea (Overweight) Korea is facing a cyclical growth challenge. Weak demand from the global economy has weighed on the production and shipment of Korea's industrial exports. However, we believe U.S. economy improving in this quarter may help Korea's export recovery .The outbreak of MERS is likely to have negative impact on consumer sentiment, but we do not foresee it to have a long lasting impact to the economy. The government also announced a supplementary budget (W15 trillion) to offset the negative impact from the recent MERS breakout. With hefty current account surplus and large foreign exchange reserve, Korea could be one of the winners during U.S. monetary tightening. We maintain overweight Korean equity market. Taiwan (Overweight) Of all emerging markets, Taiwan equity market performance is the most positively correlated to movements in US ISM new orders. With US economy improving and the US ISM new orders picking up, we believe the sluggish export in Taiwan could benefit. On the other hand, the domestic demand is being boosted by strong consumer sentiment and lowest level of unemployment since 2001. The valuation of Taiwanese equity is also very attractive. Currently, Taiwanese equity market is trading at about 13.1x forward P/E and it is the only market still trading lower than its 5 years average. We expect the improving economy and attractive valuation could support Taiwan stock market. Indonesia (Neutral) Indonesia Rupiah depreciated to the lowest level since 1998. The inflation remains high in Indonesia. Despite sluggish domestic demand, inflation remains hovering above 7% in recent months. The supply related drivers would dominate the inflation outlook in the near term. EI Nino could pose some upside risk to volatile food prices. With inflation uncertainty, the Bank of Indonesia is unable to cut the policy rate even GDP and credit growth remain very sluggish. We remain cautious about the overall economy. Russia (Neutral) EU extended the economic sanctions against Russia until the end of January 2016. Under the last 15 months of EU sanctions, recessionary trends intensified in Russia with economic contraction reaching 4.2% year on year in April. The pace of real GDP contraction deepened further in 2nd quarter. Stronger Ruble wiped off the competitive advantage of manufacturing sectors and retail sales also recorded a sharp drop. We believe the Russian economy still has a long way to go to recover from the current recession.


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Brazil (Underweight) The cumulative 12 month nominal deficit reached all-time high of 7.9% of GDP in May, which fell short from Brazil government primary fiscal surplus at 1%. On the other hand, CPI accelerated to 8.8% in June, which putting pressure to Brazil Central Bank to further hike interest rate on top of 200 basis points raised this year. With tightening fiscal and monetary policies, we maintain negative outlook on Brazilian equity market. Risk Considerations: 1) Political, liquidity, and currency risks 2) further Oil / commodity prices downside 3) Slowdown in China or U.S 4) unexpected tightening on Fed fund rate


7 Jul 2015



──── Stoxx Europe 600 Index

Stoxx Europe 600 Index Data

Market cap (EUR) 7.9trillion

52-week Hi / Lo 414/310


Y-T-D Total Return 10.55%

50 / 250 Mov.Avg. 394/369


2014 Actual P/E 23.7x




As of 06/30/2015

EUROPE

INVESTMENT SUMMARY

- With inflation and economy continues to expand, Eurozone is on track

for a gradual recovery in 3Q 15.

- Greece debt crisis continued to drive sentiments in market, however,

Grexit still not a prominent risk to Eurozone.

- Equities’ valuations are still favorable factoring in the earnings growth

prospect. Economic data shows Eurozone is gaining traction. In the past quarter, we could witness that the quantitative easing from the ECB was starting to take effect in the Eurozone economy. The Eurozone consumer price index (CPI) was 0.3% in May and 0.1% in June, considering that back in the 1

st

quarter, the CPI was still negative for 3 months in a row, the gain is significant and shows strong sign of recovery. Aside from inflation, we could see expansion in the economy by looking at the Markit Eurozone Composite PMI, the index was recorded at 54.1in June versus 53.6 in May, Services and Manufacturing PMIs were all above the watermark of 50, at 54.4 and 52.5 respectively. With the economy continues to expand and inflation starts to pick up, we believe the Eurozone economy is on track for a gradual recovery in 3Q 2015. Greece standoff causes ripples, but not prominent risk to Europe economy. As negotiation continued in the bailout talks that goes between IMF, ECB and Greek government, market sentiment was driven up and down with every single slightest achievements or hiccups along the way. Market is in focus on the outcome of the bailout talks in early July by the time of writing. However, regardless of the final outcome of the bailout talk, we still expected the Grexit to be highly unlikely, for the referendum would most likely shows result of public support to stay in the Eurozone. And even Greece is in technical default for its inability to repay its loans; the contagious effects result from it would be far less than the time during the Euro debt crisis, as Europe is now at a stronger state, with European Financial Stability Fund (EFSF) and European Stability Mechanism (ESM) and ECB monthly quantitative easing (QE) in place to maintain financial stability. Ridden by crisis, valuation is not over-stretched. The prospect of recovery attracted capital flows into the region from all over the world. Although the Greek debt “drama” caused significant drawdown to the markets, the Stoxx Europe 600 Index still gained 14% during the first half of 2015. With a prospective P/E level of 16.3x, the valuation of Stoxx Europe 600 Price Index is still lower than its latest 5 years’ averages. Germany (Overweight) German equities performed generally well since the start of 2015, however, the performance was lackluster due to the Greece debt crisis in the 2

nd quarter of 2015, YTD return declined from 23%

in 1Q15 to 16.4%, retail sales in May also recorded a negative growth of 0.4% versus market forecast of 2.8%. However, looking at the fundamental, the Germany economy was gaining paces, with CPI on yoy basis rose from -0.3% to 0.7% in May, industrial product recorded 1.4% on yoy basis, which is the highest since Aug 2014. We believe the negative impact on Greece would be short-lived, if the economy continues to improve, the Germany


7 Jul 2015


equities would continue to outperform. U.K. (Overweight) FTSE 100 index climbed 8.4% for the 1H of 2015. Even with the Greece crisis continued to worry investors in the European market, UK continued to rebound strongly after uncertainty in the political scene was finally eased off. The GfK consumer confidence after the election showed a figure of 7 which has tripled the forecast of 2 and previous figure of 1. In addition, GDP on a yearly basis for the 1

st quarter also climbed

2.9%, higher than the forecasted number of 2.5% and previous figure of 2.4%. We continued to believe that UK economy would recover strongly in the 3

rd quarter of the year, because of the stable political environment within

UK and the Bank of England successfully built up investor confidence. However, as Fed in US might be raising the rates in September, we expected BoE might be troubled by the same dilemma; the rate hike might be a hindrance to the recovery of the UK government in the near term. France (Neutral) French Statistics Bureau recorded a 0.6% growth in final 1Q GDP growth, the figure doubled the pace of Germany and Britain GDP growth of the same period, and thanks to the reduction in corporate tax rate, corporate profit also rose to 31.1%, exceeding periods since 1Q 2011. However, the labor market condition is still in trough and the depreciation in Euros did not contribute much to the current accounts of France, we remain neutral on the country’s prospect in 3Q15. Risk Considerations: 1) Greece demands austerity easing and exit from Eurozone; 2) Slowdown in China / U.S.; 3) Geopolitical developments 5) Failures to act timely by the ECB; 6) Global slowdown which affect overall sentiment and interfere Eurozone’s recovery progress.


7 Jul 2015



──── HS China Enterprise Index

HS China Enterprise Index Data

Market cap (HKD) 3.34Trillion

52-week Hi / Lo 14,802 /10,186

3-Mth Return +7.8%

Y-T-D Return +11.0%

50 / 250 Mov.Avg. 13,985 /11,853

2015 Est Yield 3.3%

2014 Historic P/E 9.2x




As of 06/30/2015


──── CSI 300 Index

CSI 300 Index Data

Market cap (RMB) 9.93Trillion

52-week Hi / Lo 5,354 / 2,143

3-Mth Total Return +11.2%

Y-T-D Total Return +27.5%

50 / 250 Mov.Avg. 4,852 / 3,326

2015 Est Yield 1.4%

2014 Historic P/E 19.7x




As of 06/30/2015

CHINA / HONG KONG

INVESTMENT SUMMARY

- Further stimulating monetary policies and reforms will be the key investment theme in 3Q15.

- H-share is attractive given low valuation, while A-share market will be volatile in 3Q.

- We anticipate China financials, property, TMT, infrastructure, pharmaceutical, IPP and new energy will outperform.

More monetary policies are expected to come. Most China economic figures remained weak. China export in May declined 2.8% yoy. HSBC China Manufacturing PMI for Jun stayed below 50 threshold, indicating the contraction of manufacturing activities for SMEs. All the growths of retail sales, fixed asset investment and industrial production remained weak. Nearly all economic figures pointed out that China economy is still facing downward pressure. We believe China government will further introduce more monetary easing measures. Reform is one of the key growth drivers. China government is striving to introduce economic reforms and SOE reforms. Many sectors will undergo reforms, including financials, telecom, resources, pharmaceutical, power, etc. It is believed that reforms will enhance productivity, industry transparency and benefit economic long-term development. On the other hand, SOE reforms include asset restructure, management incentive and mixed ownership. Unlisted SOE companies will speed up to inject quality assets into their listcos which will boost listcos’ earnings growth as well as valuation. SZ-HK Stock Connect will be a catalyst. It is expected that Shenzhen-HK Stock Connect will be launched in 2H15. Even though it may be delayed (according to newspaper), we expect delay timing not to be long. We believe SZ-HK Stock Connect would be one of the market catalysts. Positive on H-share index given attractive valuation. We are positive on both HK stock market and A-share market in the mid-and long-term. However, in the near term, we are more confident on H-share given its attractive valuation at ~9x 2015 PE. We maintain our HSCEI year-end target at 16,000. For A-share markets, government curbed margin financing in May-Jun, resulting in the near-term high volatility. Although government has launched several stimulus measures on A-share market, we expect A-share to be still volatile in the near term due to weak sentiment and relatively high valuation. However, easing monetary policy and reforms will continue drive A-share market in 4Q15. We expect A-share markets to be volatile in 3Q15 and have a better performance in 4Q15. Which sectors we like in 3Q15? For HK stock market, we like China financials, large China property developers and infrastructure as they will benefit from monetary easing measures. We are positive on TMT, pharmaceutical and new energy sector with their strong earnings growth. Independent power producers (IPP) would be one of the key reform sectors and their parentcos will accelerate to asset injections. Risk Considerations: 1) deflation; 2) policy undershoot; 3) continuous slowdown in property market; and 4) large scale hot money outflows.


7 Jul 2015



──── Hang Seng Index

Hang Seng Index Data

Market cap (HKD) 8.84Trillion

52-week Hi / Lo 28,443 / 22,586

3-Mth Total Return +7.3% Y-T-D Total Return +13.7%

50 / 250 Mov.Avg. 27,437 / 24,836

2015 Est Yield 3.2% 2014 Historic P/E 11.0x 2015 Estimated P/E 12.6x 2015 Estimated P/B 1.36x


As of 06/30/2015

China Sector Snapshot Financial (upgrade to Overweight) We turn to have positive view on China Banks, given hopes of unfolding game-changing reforms and further policy easing. At the end of Jun, State Council endorsed draft amendment of removing regulatory LDR cap of 75%. This should make banks more resilient to rise in funding costs brought by slowing deposit growth. And PBoC simultaneously cut both lending rates and RRR. Rate cut could help reduce social financing costs and cushion some asset quality pressures. The coming catalysts will be local government debt swap, SOE and mixed ownership reforms, and further policy easing. We upgrade our view to OVERWEIGHT on China Banks. But Insurance and Brokerage will be volatile as proxies to A share stock market, which is with heightened volatility.

Property (maintain Overweight) Market believes key developers’ 1H15 average interest cost will narrow to 6.7% versus 7.0% in FY14, and will continue to narrow ahead which aids margin recovery. And with consecutive rate cut and lower down-payment, homebuyers’ affordability has largely improved. It is believed more aggressive policy loosening for the sector would come. Potential measures could be further lowering first-home mortgages and strictly enforcing banks to provide mortgage rate discount. In addition to policy easing, other positive drivers for a sector rally may be 1) further stronger sales rebound in June, likely to roll over into July and Aug; 2) sector’s aggressive capital raising mostly done already.

Technology, Media & Telecommunications (maintain Overweight) China 4G net adds recovered, up 76.6% mom to 13.4mn in May. Rapid growth in data volumes will benefit telcos and telecom equipment vendors. And penetration rate of 3G/ 4G has accelerated to 52.0%. We see larger monetization potential for the market leaders in internet and software sectors, which has built scalable ecosystem in mobile internet. We maintain our OVERWEIGHT view on the sector.

Infrastructure (maintain Overweight) As pro-growth measures to be rolled out in light of the weaker-than-expected economic growth, it is expected China Railway Corporation to increase the railway FAI target, same as last year. In the past few months, China has made material progress in overseas contracts, including a survey/design order of Russia HSR, a metro order in Israel, a framework agreement of metro EPC in Kazakhstan, and the railway survey in Brazil. We maintain our view to BUY on the sector. Pharmaceutical (maintain Overweight) Government will continue healthcare reform this year and may allow online drug sales. This will benefit the large drug distributors with online sale business. Also, large drug companies are forecasted to have strong earnings growth, driven by production expansion and gain in market share. Market concerns on further drug price cut which has reflected in recent price weakness.

New energy (maintain Overweight) China government will continue to encourage the use of clean energy. We believe wind speed recovery in China will largely boost wind farms’ utilization and earnings growth this year. On the other hand, we expect gas distributor to have steady earnings growth despite weaker-than-expected gas demand. Large gas distributors are likely to gain more market share.


7 Jul 2015


IPP (maintain Overweight) We expect coal price to keep low in 2H15 due to oversupply. Being a high financial leverage sector, we expect further interest rate cut to ease their financial pressure and help to drive earnings. Moreover, their parentco will speed up to inject quality assets into listcos which will drive listcos’ earnings growth. Given sector average ~9x 2015 PE and 4.4% yield, valuation is attractive.


7 Jul 2015



──── Nikkei 225 Index Nikkei 225 Index Data

Market cap (JPY) 368.9trillion

52-week Hi / Lo 19,754/13,910

3-Mth Total Return 3.75%

Y-T-D Total Return 16.77%

50 / 250 Mov.Avg. 20,868/14,533






As of 06/30/2015

Japan

INVESTMENT SUMMARY

- Monetary and Fiscal policy in unison to drive inflation and economic growth.

- Nikkei 225 kept supported above 20,000 despite mixed readings in economic data and business sentiment.

- Data dependent BOJ on the sidelines, but open to further quantitative easing options.

Expansionary policies seeing encouraging effects. Under the influences of “Abenomics”, the Japanese economy is seen to be growing with Nikkei 225 rising to record highs above 20,000 since Abe’s appointment as the new P.M. of Japan. The unprecedented expansion in monetary policy and proactive shift in fiscal policies to drive economic growth and inflation paved the way for Japan’s economic revival. Recent announcement of the second hike in sales tax rate (from 8% to 10%) originally scheduled for October this year being delayed till April 2017 adds to the prospect towards economic growth and increased inflation, however it does present headwinds towards Abe’s government on the matter of fiscal consolidation to reduce the government’s fiscal deficits. Despite the efforts from both the Japanese government and the Bank of Japan to promote growth through an expansionary monetary policy and a flexible fiscal policy, The third arrow in “Abenomics” is still the Achilles heel in Japan’s economic growth; a lack of a defined growth strategy. Silver lining in a neutral environment with mixed data. Data wise, domestic consumption rose in May with Core real household spending rising 2.1% m/m on the back of a firming labor market in Japan, reversing the loss sustained the initial VAT rate hike in April came in at -3.5% m/m. Though an encouraging rebound in the data, Household consumption remains soft, prompting Abe’s decision to further delay the second sales tax hike to a later date. Core CPI (all items ex.fresh food) has seen a slight increase of 0.1% y/y in May after coming in flat (ex. VAT) in April. Despite the increase, CPI inflation remains soft while oil price were seen a rebounding in Q2 2015, however with Iran’s discussions on uranium production back in focus, any accord struck between Iran and the US that would have Iran’s sanctions lifted would cause oil prices to drop further, potentially pushing Japan’s CPI rates back to negative territories looking forward. Employment in Japan however, shows a more positive note, with labor force growth seen increasing by 0.3% m/m in May after a -0.5% m/m reading in April; job prospects are also seen improving with Job offers ratio rose from 1.17% in April to 1.19% in May, evidencing Japan’s economy to be driven by domestic consumption. Manufacturing is also seen improving thanks to the weaker Yen with PMIs in Services and Composite seen rising in May, Services: 51.5 vs. Prev. 51.3, Composite: 51.6 vs. Previous 50.7. Bank of Japan on the sidelines. In June, after the depreciation in the value of Yen prompted the rise in USDJPY exchange rates from 118 to 125 highs, The Greek debacle has seen a global risk-off sentiment which translated to Yen currency being bought up on market uncertainty. USDJPY falling from 125 to 122 from the risk-off sentiments. Comments from the BOJ suggested that FX rates should reflect the markets’ flow of demand and supply, yet suggested further monetary easing is still a possibility for the year in order to achieve the inflation target set out by the BOJ. Any


7 Jul 2015


further monetary easing however will be highly depending on upcoming economic data, whether if inflation and GDP growth momentum recedes. If BOJ decides to increase QE, it may likely be through the medium of risk assets such as equities and exchange traded funds. Risk Considerations: 1) Inability to implement structural and other economic reforms; 2) Yen appreciation due to global risk-off sentiment; 3) significant surge in JGB yield 4) fiscal deficits caused by delayed sales taxes increase; 5) BOJ fails to enact further easing in order to boost inflation by its self-imposed deadline


7 Jul 2015


US Treasury 10 Year Yield GERMAN 10 Year Treasury

BONDS

FOMC likely to raise interest rate by end of 3Q 2015 The June FOMC meeting did not announce any rate hikes but re-iterated that the decision would be data dependent and gradual in pace. The market’s general consensus on tightening would be in September, but with an increasing number of investors betting on a further delay on rate hike to December or even early next year. In the meantime, after a sufficient upward movement of US Treasury in 2015 2

nd quarter, there is a high

chance for Treasury yield to be consolidated at this level and become volatile again before the mid-September FOMC meeting.

Worst for Greece, market awaits for a silver lining Greece situation has turned into the worst as the Greek prime minister has put the latest reform proposal from Greece’ creditors to a referendum on 5 July 2015. If the “no” vote in the referendum is the answer from Greece’ public, the chance for Greece to left Eurozone would be substantially higher. Also an IMF payment was scheduled to mature on 30 Jun 2015 but has been missed. Greece’ bond may then enter into the technical default zone. Greece debt trouble remains as one of the most influential incidents in the global bond market. Driven by the “flight for safety” sentiment, the Germany 10-yr treasury yield has plunged to 0.75% from 0.9% during the last week of June. Risk adverse market behavior could further widen corporate’s credit spread and put pressure on the global corporate bond prices. Investors should be more cautious on the European debt. Enormous fund outflows from fixed income sector in June 2015 The lately volatile US Treasury has made investors reluctant to put money into the Bond fund market. There is a sufficient fund outflows recorded in June. Both developed market (DM) and emerging market (EM) bond funds recorded cumulative net outflows by the end of 1H2015, of which the retail investors were the major sellers while Institutional investors were the bargain hunters in the market. As for DM bond funds, high grade and high yield bond funds were taking the majority of the toll, with high yield bond funds trying to reverse its outflow in the last week of 2Q 2015. CNY is being planned to join the Special Drawing Rights family An IMF fund team has visited China to have technical discussion on CNY inclusion in the Special Drawing Rights (“SDR”) basket. SDR review is performed every 5 years and the market is expecting 50% chance of CNY joining the SDR family in the upcoming revision in Oct 2015. Chinese Government regards the inclusion of CNY into the SDR basket as one of the major milestone for CNY Internationalization. Market analysts believed that CNY has already satisfied some criteria to become SDR, but further steps are needed to match with the freely usable criteria. Therefore, further loosening measures in China’s capital control are expected this year. These measures can enhance the global appetite in CNY currency and related CNY investment products. CNY bond sector could be expected to be benefit from it. China real estate markets recovered in 2Q 2015 Chinese Central Bank has announced its 3

rd 25 bps cut in interest rate this

year, together with a cut in China’s Required Deposit Reserve Ratio of a total 150bps reduction. Market has expected the Chinese Government to implement monetary easing policy and further stimulate measures that could be announced in the second half of the year. Therefore, some signs of turnaround in the Chinese real estate markets have been seen. In May


7 Jul 2015


2015, based on the National Bureau of Statistics of China, there were 20 and 37 cities out of the 70 largest cities in China having a raise in new and existing home prices respectively. These numbers have been started increasing since Mar 2015 with 1

st tier cities benefited the most. 2

nd tier

cities housing price is generally stable and 3rd

tier cities housing price is still lagging. With further improvement in the real estate market sentiment, 2

nd

and 3rd

tier cities housing prices could be expected to eventually being picked up. In addition, more and more property developers have received approval for issuance of domestic CNY bonds in the onshore market. Based on current market practices, the cost of bond insurance could be lower in onshore than offshore markets as onshore bonds may have a higher local credit rating. If property developers can issue low cost domestic bond successfully, the interest expense of the companies can be reduced and liquidity can be enhanced. This positive stimulation could result in favor of their offshore bonds as well. Risk Considerations: i) Unexpected large level of rate hike in US; ii) Deterioration of US and Chinese economy; iii) Prolonged global recession; iv) Unexpected global deflation; v) Sharp decline in asset prices. vi.) Greece exits Eurozone, and vii.) disintegration of Euros.


7 Jul 2015



──── AUD/USD

AUD/USD Data

RBA Cash Rate 2.00%

52-week Hi / Lo 0.9460 / 0.7548

3-Mth Change +0.85%

12-Mth Change -18.28%

50 / 250 Day

Moving Average

0.7807 / 0.8323


As of 6/30/2015

AUD/USD

INVESTMENT SUMMARY

- China’s economic recovery in Q3 will underpin Australian dollar - Global commodity prices are close to bottoming out - AU-US yield spread widens and supports the currency pair - AUD/USD third quarter target at 0.7800

China’s economic recovery in Q3 will underpin Australian dollar

China’s central bank has cut lending rates for the fourth time since November last year and lowered the bank’s reserve requirement ratio for several times in the view of economic slowdown. We believe the central bank will continue to implement easing monetary policies to stimulate the domestic economy. We expect a further slowdown in China’s second quarter GDP, as the industrial output and manufacturing production growth turned slow. However We believe China, the biggest trade partner of Australia, will most probably pick up in the third quarter because of the positive impact of the central bank’s monetary policies, posting positive impact on Australia export sector and hence its economy, and underpinning the exchange rate of Australian dollar.

Global commodity prices are close to bottoming out

We believe the Greece debt crisis will have little impact on commodity markets and we could see the demand of commodity was climbing up in the second quarter. The price of iron ore, which accounts for more than 20 percent of Australia’s export income, rebounded by nearly 30 percent in the second quarter as demand rose and benefitted the mining investment in the country. We are forecasting that the iron ore price are bottomed out in the second quarter and will be stable in the second half year, which help to stabilize the trend of the Australian dollar. Besides, the domestic economy will be benefited from the low energy cost and low currency exchange rate may attract more foreign fund flow to Australia for investment purpose. Hence, we expect the local currency will climb up at the end of this year.

AU-US yield spread widens and supports the currency pair

The RBA has cut interest rates for two times in February and May to 2.00 percent, aiming to stimulate non-mining growth amid labor market slack, sluggish consumer confidence and business investment. In its second time rate cut, we could see the investors were fully priced in and the Australian dollar rebounded against the U.S. dollar after the statement in May. As the labor market and property market in Australia improved, we believe it is less likely to see further rate cut from RBA within this year but the central bank is still reluctant to withdraw the easing policy in the short period of time. On the other hand, the U.S. economic figures, especially the labor market figures, were beating market estimates in the second quarter, fueling the expectation on rate hike from the Fed Reserve by the end of this year. We can see the Fed rate hike expectation has been, to some extent, reflected in the currency market. Besides, the yield spread between 2 year AU government bond and US T-bond shows a sign of bounce in the second quarter after reaching nearly 8-year low in the first quarter. Looking forward to the third quarter, we believe AU-US yield spread will be stabilizing and this carry trade pairing will gain back its attractiveness.


7 Jul 2015



──── GBP/USD

GBP/USD Data

BOE Bank Rate 0.50%

52-week Hi / Lo 1.7161 / 1.4598

3-Mth Return +6.21%

12-Mth Return - 8.27%

50 / 250 Day

Moving Average 1.5463 / 1.5694


As of 6/30/2015

GBP/USD

INVESTMENT SUMMARY

- In-out EU referendum poses limited impact on currency this year

- Economic growth is picking up pace this year

- Stance of monetary policy from Bank of England

- GBP/USD third quarter target at 1.6000

In-out EU referendum poses limited impact on currency this year

Prime Minister David Cameron and his Conservative Party won the UK general election on 7 May without forming coalition government, settling the major political issue in the UK this year. However, the market concern soon switched to an in-out EU referendum by the end of 2017 David Cameron has pledged to hold. As UK parliament has already ruled out holding the referendum on the same day as the Scottish and London elections in May 2016, we believe 2017 would be the more likely date for the referendum. It is undeniable that there will be a huge political risk on the sterling pound exchange rate during the year 2016-2017, but we think the impact would be quite limited in this year and we are fundamentally bullish on the sterling.

Economic growth is picking up pace this year

The lower petrol prices in recent months were boosting disposable income, and more consumers spending benefitted the businesses such as retail, wholesale and consumer services in UK. The GDP advanced 2.9 percent year-on-year in the first quarter of 2015, after confirming at 7-year high in the fourth quarter last year. Besides, unemployment rate was stable at 5.5 percent in April, the lowest since mid-2008 and the wage growth showed a decent improvement. We believe UK economy will continue to grow this year. UK June Services and Construction Purchasing Manager’s Index (PMI) had shown improvement while Manufacturing sector was still lagging market estimates despite holding above the 50 mark that separates growth from contraction. The growth of housing market starts to show a sign of slowdown, but with low inflation and mortgage rate, wages starting to rise and consumer confidence remaining high, we expect the housing market to pick up again over the third quarter. In general, after two years of recovery, the UK is likely to continue to grow faster than most of its G7 counter-parties.

Stance of monetary policy from Bank of England

Though the economy expanded at a faster pace than market expectation and growth is forecasted to remain strong this year, the fall in oil prices has induced global inflation tumbling and put over the Bank of England to keep loose monetary policy this year. UK saw a monthly 0.2 percent inflation in May, which had shown a small improvement from the first quarter. The BOE has concern on a stronger domestic currency will tend to lower inflation, which would disappoint sterling bulls. Therefore, a neutral stance from the central bank is expected in the coming rate decision in next couples of meetings. We predict that the sterling may not move too sharply but rise in a more progressive way towards 1.6000 in the third quarter. The BOE is believed to follow the U.S. Federal Reserve to become the second major central bank to lift interest rate, and the initial hike is forecasted to take place in the first quarter of 2016.


7 Jul 2015



──── USD/JPY

USD/JPY Data

BOJ Unsecured

Overnight Call

Rate

0.10%

52-week Hi / Lo 125.63 / 101.30

3-Mth Return +2.08%

12-Mth Return +20.51%

50 / 250 Day



As of 6/30/2015

USD/JPY

INVESTMENT SUMMARY

- Monetary policy divergence between U.S. and Japan

- Recent economic figures suggested yen depreciation was not enough

- The Bank of Japan’s stance on the weak yen currency

- USD/JPY third quarter target at 125.00

Monetary policy divergence between U.S. and Japan

In the 17 June FOMC meeting, the Fed remained interest rate unchanged and said the U.S. economy was strong enough to handle rate hike by the end of this year, but concerns remained over the recovery of the labor market and confidence that inflation will move to its 2 percent objective. We believe after the impact of bad weather in the first quarter, the labor market will show a sign of healing for rest of the year and we can see inflation is starting to pick up. Though the Fed downgraded economic outlook in the June meeting, signaling a slowdown in rate hike pace, but we believe the Fed will probably start rate hike by the end of this year. The yen exchange rate is sensitive to U.S. interest rate to some extent and the US-JP sovereign bond yield spread is still at a very low level over the past 10 years. Therefore, if the yield spread widens due to the Fed rate hike by the end of this year, a further yen depreciation will be seen.

Recent economic figures suggested yen depreciation was not enough

Japan trade deficit widened to 216 billion yen in May this year, following a deficit of 55.8 billion yen in April. The trade balance was in surplus in March. Trade balance is the major component to Japan’s economy and we can see the weak yen policy could not help Japan with stable trade surplus. That may imply the domestic currency is not weak enough for generating stable trade surplus. Japan’s first quarter recorded a year-on-year growth of 3.9%, showing growth for a second consecutive quarter. Besides, household spending rose 4.8 percent on year in May, marking the first on-year increase since the country raised consumption tax in April 2014. However, the core consumer price index rose only 0.1 percent on-year in May. It is skeptical that the inflation could reach the BOJ target as soon as the central bank official expected. Hence, yen depreciation is still preferable for a sustainable economic growth in Japan.

The Bank of Japan’s stance on the weak yen currency

We reduce expectations for BOJ’s further policy easing in the coming few months from the recent meeting statements of the central bank. Comments from the governor Kuroda may slow further declines in the currency and the Japan’s economy may not need extra monetary stimulus. From Kuroda’s clarification on the real-effective exchange rate of the yen in June, we believe the BOJ was not trying to totally curb the yen weakness but they just expressed the stance that a severe depreciation was not preferable. Hence, we believe the U.S. dollar is going to consolidate against the yen in the third quarter and the exchange rate will probably break out the range bound if the Fed Reserve confirms to raise its interest rate by the end of this year.


7 Jul 2015



──── EUR/USD

EUR/USD Data

ECB Main

Refinancing Rate 0.05%

52-week Hi / Lo 1.3689 / 1.0496

3-Mth Return +3.98%

12-Mth Return -18.29%

50 / 250 Day



As of 6/30/2015

EUR/USD

INVESTMENT SUMMARY

- Eurozone’s economy continues to improve

- The US-German government bonds yield spread may remain stable

- The impact of potential “Grexit” should be manageable

- EUR/USD third quarter target at 1.1500

Eurozone’s economy continues to improve

Eurozone's GDP grew by 0.4% qoq in 1Q, up from 0.3% in the previous quarter. The growth in the region outpaced that in the US. Inflation has picked up in 2Q15, reversing the deflation pattern existed in 1Q15. CPI in June for the region rose 0.2% annually. Business sentiment recovered as well, in particular the services sector. Eurozone Markit manufacturing PMI climbed to 52.5 in June, well above the neutral level, indicating a decent expansion in the manufacturing sector. Markit services PMI came even better that reached a 4 year high to 54.4 in June. The accommodative monetary policies adopted by ECB, a relative low EUR exchange rate and the weakness in oil prices should further stimulate business investment and expansion of operation, which should be a key driver of the regional economy in the second half of the year.

The US-German government bonds yield spread may remain stable

The Fed unexpectedly kept interest rate unchanged in June, while downgraded the 2015 growth forecast. Fed Chair Janet Yellen emphasized that a decisive evidence of economic growth is needed to support a change in monetary policy. Though the prospect of Fed's rate hike this year remains, the pace should be more gradual than market previously estimated. Meanwhile, amid an improving Eurozone's economic outlook, there is a low chance for ECB to step up its bond buying program. As a drastic change in monetary policy of the Fed and that of ECB should be rare, the yield spread between the US government bonds and German government bonds of same maturity may start stabilizing. Stable yield spread should lessen the selling pressure over the euro against the dollar.

The impact of potential “Grexit” should be manageable

Despite Greece's referendum denying international creditors’ bail-out proposal, a compromise between Greece and international creditors is not out of reach. A resolution of Greece problem will be viewed as EUR positive. Undeniably, the default increased the likelihood of Grexit and contagion effects could build. However, the magnitude of contagion should be more manageable, when compared to Eurozone debt crisis in 2011, as nowadays more ECB support mechanisms are available. Besides, no catastrophic sell-off in periphery bonds suggests investors are of less panic than last time. We believe a Grexit, though is unlikely in our point of view, may put imminent pressure on the euro and dampen market sentiment. But in the medium to long run, the market will re-focus on economic fundamentals, which should be supportive of euro.

http://www.google.com.hk/url?url=http://qooah.com/2012/02/11/%E6%9C%89%E5%82%B3%E6%AD%90%E7%9B%9F%E5%B0%87%E7%84%A1%E6%A2%9D%E4%BB%B6%E6%89%B9%E5%87%86-google-%E6%94%B6%E8%B3%BC-motorola/&rct=j&frm=1&q=&esrc=s&sa=U&ei=N1maVYKLB-KwmwXPkYGACw&ved=0CBkQ9QEwAg&usg=AFQjCNHUeVc0vboHmkJuYZIhMb0aq4y_kg


7 Jul 2015


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7 Jul 2015


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Documents

Hang Seng Investment 3Q15.pdf