A “no deal” world
As we enter 3Q19, G20 has provided a new negotiation window for the next two or three months, although signals from the USA and China suggest trade talks will be long lasting. In a no-deal world, the good news is that easing policy continues. China Banking and Insurance Regulatory Commission’s guidance investment and takeover of Baoshang Bank have raised new concerns. However, our analysis on negotiable-certificates-of-deposits issuance and open-market operations shows that near-term liquidity remains intact.
Unexciting interim results
We echo the view that trading opportunities ride on ample liquidity and the post-G20 window of resumed trade talks, but what prevents us from having a more bullish stance is potentially unexciting 1H19 earnings. Domestic growth pressure is mounting, with unresolved trade tensions hurting corporate confidence and capital expenditure. Though not our base case, we cannot rule out the possibility of tariffs on the remaining US$300bn of goods, which adds 5% downside risk on MXCN 2019 earnings. As counter-cyclical policy remains, we believe that a recovery in earnings is still on the way but could be delayed as we enter a period of exciting easing but unexciting growth.
Open market operations
Stock Connect flows are also interesting. We believe foreign inflow is still the most critical factor in the onshore A-share market in 2H19, driven by their inclusion in the global index. Another reason for our optimism here is the “potential” government back-up due to systematic risks from pledged shares, while offshore vitalities may face more external volatility.
Additional external risks to the economy muted for now
In the context of easing amid unexciting growth, there are limited options for investors who increasingly are valuing quality growth and high-visibility names with yield. Our base case remains that China and the USA will still be negotiating towards the end of the year, or even longer. In the meantime, additional external risks to the economy have been muted.