Hong Kong-China Equities: Earnings Growth Ahead?

There are a number of themes shaping the Hong Kong-China equities landscape today. For one, China’s government appears determined to step up policy support—and the market is eyeing the potential impact of the relevant stimulus on the underlying economy in the coming months. The current round of Chinese stimulus appears concerted and targeted, and it has provided a boost to investor sentiment. And given the low base and low current valuations in the market, it also has the potential to support earnings growth going forward.

The commencement of the U.S. Federal Reserve’s (Fed) interest rate-cutting cycle should also be broadly supportive for emerging markets equities. This has also enabled other central banks, including the People’s Bank of China (PBoC), to implement monetary policies to support their domestic economies. At the same time, the labor markets in the U.S. and Europe remain resilient, which is likely to maintain demand for Chinese exports.

Supportive Backdrop But Risks Remain

Within China, one notable difference for the current episode of policy support is the focused measures on key areas of economic concern—including cutting interest rates on existing mortgages, rebates for replacement demand, and asset swaps for institutional investors investing in the stock market with a line of credit from the PBoC. These are aimed at stimulating investment and consumption, which are core issues to reviving China’s economy. However, given that these policies will likely take some time to permeate into the underlying economy, and company fundamentals may still face headwinds in the coming months, earnings growth is only likely to return next year. Companies that are direct beneficiaries of these policies, especially those in the consumer and property sectors, are strong contenders for potential outperformance.

While this backdrop is supportive, there are several headwinds on the horizon. The most concrete part of the policies recently introduced in China remain primarily focused on the monetary policy side addressing liquidity issues. Although the government has hinted at a significant fiscal package funded by special bond issuances, details remain elusive—and any disappointment could still sway market sentiment. Externally, risks also remain as geopolitical uncertainties continue to loom. U.S. elections, tariffs with the E.U., and conflicts in Eastern Europe and the Middle East are also factors to watch, suggesting the potential for ongoing bouts of volatility in the near term. However, given the broader stimulative measures by the Chinese government, we believe these short-term periods of market weakness could present opportunities to revisit the investment case in Hong Kong-Chinese equities.

Valuations Remain Attractive

As the economy gradually normalizes, we are finding attractively priced, strong structural growth opportunities from a bottom-up perspective, which could positively contribute to relative performance in the months to come. Structural trends such as sustainable growth, self-sufficiency in the supply chain, scientific and technological innovations, and environmental awareness, would 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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