JPMorgan Chase's Liu Mingdi: The market will fluctuate within a range in the second quarter, and Hong Kong stocks are expected to break through in the third quarter

Author | Zhou Zhiyu

Editor | Zhang Xiaoling

In the second quarter, the market may "take a step back and then two steps forward." If substantial progress is made in trade negotiations in the third quarter, Hong Kong stocks are expected to break through the current range. Liu Mingdi, Chief Asia and China Equity Strategist at JPMorgan Chase, made this judgment regarding the upcoming market trends at the "JPMorgan Global China Summit Media Briefing" on May 21.

In the short term, the escalation of trade friction in early April led to a significant pullback in Hong Kong stocks, but the market gradually digested the negative news and rebounded, currently in a range-bound fluctuation.

Liu Mingdi believes that if substantial progress is made in trade negotiations in the third quarter, Hong Kong stocks are likely to break through the current range. She holds an optimistic view on Hong Kong stocks, expecting the MSCI China Index to have a minimum drop of 70 points (single-digit downside), a neutral expectation of 80 points (single-digit upside), and an optimistic scenario reaching 89 points (double-digit upside). In contrast, while A-shares are also viewed positively, the earnings growth momentum of the CSI 300 Index is relatively weak, and its valuation is higher compared to Hong Kong stocks, with a baseline expectation of 4150 points, an optimistic scenario of 4420 points, and a pessimistic scenario of 3800 points.

In terms of industry allocation, Liu Mingdi continues to prefer high-growth sectors but emphasizes the need for dynamic adjustments to valuation expectations.

Last Friday, JPMorgan Chase downgraded the rating of the information technology sector from overweight to neutral, citing that valuations and expectations are relatively full. She warned that even for high-growth technology companies, maintaining a price-to-sales (PS) ratio of 25-30 times in the long term is challenging, and investors should be cautious of the risk of market sentiment retreating.

Regarding the recently popular innovative drug sector, Liu Mingdi remains optimistic. She believes that if U.S. healthcare reforms lower drug prices, it will compel Chinese pharmaceutical companies to accelerate innovation, benefiting local pharmaceutical companies that have established a healthy ecosystem.

Liu Mingdi suggests paying attention to consolidation opportunities in overcapacity industries (such as materials and industrial sectors) and the expansion of investment targets brought about by the opening of the financial sector. By comparing MSCI China with Japan's Tokyo Stock Exchange Index in 1998, she points out that the current themes related to market access/market opening, especially in the financial sector, have valuation levels similar to those before Japan's financial reform. If policies promote industry consolidation, it is expected to initiate a new round of valuation recovery.

Additionally, she believes that the support from the State-owned Assets Supervision and Administration Commission and the China Securities Regulatory Commission for mergers and acquisitions is expected to drive supply-side reforms in sectors such as materials and industry. This theme is similar to the supply-side reform of 2016 but with greater execution difficulty. For investors, the opportunity in A-shares lies in shifting from "valuation speculation" to "earnings growth," focusing on companies with endogenous expansion or merger potential, rather than solely relying on liquidity-driven small and mid-cap targets.

Liu Mingdi particularly emphasizes the unique advantages of Hong Kong stocks. Hong Kong stocks are highly sensitive to the performance of listed companies, and firms with clear earnings growth are more likely to gain funding recognition. While liquidity is not as strong as in A-shares, the valuation system is becoming more rational; with the return of Chinese concept stocks and mainland companies listing in Hong Kong, Hong Kong stocks have become a bridge connecting the mainland with global capital. The trading volume of southbound funds (Hong Kong Stock Connect) has reached 20%-25%, significantly enhancing marginal pricing power, and the central bank's foreign exchange management policies further strengthen its position In addition, Hong Kong stock dividend stocks correspond to US dollar asset returns, making them more attractive compared to mainland government bond yields, becoming the preferred choice for conservative funds.

From a global capital perspective, Chinese stocks have become a "niche asset" in recent years due to low returns, with 30% of overseas investors liquidating their Chinese stocks last year, and this proportion has risen to 38%-39% this year. However, it is worth noting that a survey in April showed that net buying intentions have exceeded net selling for the first time, indicating that extreme pessimism has bottomed out.

AI technology has become a key variable affecting capital allocation. Chinese internet companies, as the application end of AI, have become a choice for global funds to hedge against the high valuations of US tech stocks due to their lower computing power costs (compared to their American counterparts).

Liu Mingdi emphasized that every industry has a valuation peak, and the advantage of Hong Kong stocks lies in "gradual pricing," which is more suitable for long-term capital allocation.

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The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investment based on this is at one's own risk