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MNI MARKET ANALYSIS: Chinese Equities Screening Undervalued

Executive summary

  • Divergence in monetary policy between China (easing) and the Fed (tightening) could lead to several opportunities in Chinese risky assets, which have been trading at ‘distressed’ levels in recent months due to the significant deceleration in economic activity.
  • In addition, CNY could also start to depreciate against the US Dollar in the coming months after appreciating sharply against major crosses in the past 18 months.
    • MNI INTERVIEW - Yuan Seen Peaking Near 6.2 Against Dollar In Q2 (page 7)
  • Major risk for China remains its zero-Covid policy, which keeps weighing on growth expectations and therefore maintains uncertainty elevated in markets.

Link to full article:

China Rotation.pdf

The divergence in monetary policy between US (preparing for tightening) and China (easing) could lead to a rotation from ‘expensive’ (i.e. US tech) to ‘cheap’ (China tech) stocks. China tech is undervalued following the sharp selloff in 2021. China tech (CQQQ) is down over 45% since its high reached in February 2021 (which corresponds to the peak in the Chinese economy).

The tech sector (China) could also be supported by a reversal in China ‘liquidity’, which seems to have found a bottom in Q4 2021. The chart below shows the strong co-movement between China TSF 12M sum and tech equities (YoY change) in the past cycle.

Source: Bloomberg/MNI

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