Hong Kong-China Equities: Attractive Valuations and Room for Earnings Growth

As we enter the second half of the year, the market is focused on how decisions made at the Third Plenum and subsequent politburo meeting will affect China’s medium- to longer-term economic policies. The meetings come after an extended period of post-Covid normalization, with gradually increasing policy support this year. In our view, there is the potential for positive policy surprises given the current low expectations—which has been reflected in market valuations due to the government’s perceived priority on economic stabilization.

In addition, given the low-base effect, company fundamentals are likely to improve in the coming months. The recently introduced stock market reforms are incentivizing payouts to investors, alongside higher requirements for public listings. This, in our view, should help to improve the overall quality of the public equity markets, and should shift investor focus toward fundamentals over liquidity. We should also begin to see a greater number of IPOs coming to the market, which will offer a pipeline of higher quality exposure in Chinese companies.

After this year’s initial sell-off and subsequent rally based on liquidity and relative valuations, we have entered a phase of consolidation. The government’s policy priorities could pave the way for earnings growth, especially in companies that could benefit from either structural trends in China or globally, or due to significant mispricing of fundamentals.

That said, several external tail risks remain, especially pertaining to geopolitical risks. As we head toward the U.S. elections, China is likely to be the subject of calls for sanctions and containment, which could create bouts of sentiment-driven volatility. In Europe, the relative strength of right-wing parties could also lead to increasing frictions. However, it is worth noting that China's share of exports to emerging economies has been rising consistently, which should help to mitigate some of the impact.

Attractive Valuations 

In terms of valuation, Hong Kong-China equities are currently trading at the lower end of their historical range, which could represent attractive entry points for longer term investors. As the economy gradually normalizes, we are finding attractively priced, strong structural growth opportunities from a bottom-up perspective. Structural trends such as sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and environmental awareness, are likely to continue to unfold. This should bolster the outlook on sectors and themes such as new infrastructure, domestic consumption, health care, technology localization, and sustainability in the medium to longer term.

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