20 February 2019
Global Equity StrategyTable of contents
GEM equities: reduce our overweight3
1.Chinese economic momentum – a lot is priced in now3
2.GEM equities have decoupled from TIPS yields7
3.Trade war – risk to the downside8
4.The clear undervaluation of GEM has diminished10
5.Markets expect earnings revisions to be better in GEM than in DM10
6.Clients are clearly optimistic on GEM11
7.Our model indicates limited upside potential12
Why maintain a small overweight12
Chinese equities – Remain overweight18
Appendix....20
20 February 2019
Global Equity StrategyGEM equities: reduce our overweight
In light of our recent move to downgrade global equities to benchmark, we reduce the size
of our overweight in emerging markets (from 12% overweight to 7%). This is for the
following reasons:
1.Chinese economic momentum – a lot is priced in now
The relative performance of GEM equities has decoupled significantly from China PMIs,
outperforming as PMIs fell. This is consistent with other China proxies such as European
autos, mining and copper, which also outperformed/rose as Chinese PMIs fell (see the
Appendix).
Figure 1: EMs are discounting a rise in China PMIs…
-20
-15
-10
-5515
44
46
48
50
52
54
56
201120122014201520172019
China manufacturing PMI new order
MSCI EM rel to the world, 3m change %, in dollar terms, RHS
Source: Refinitiv, Credit Suisse research
While we think there will be stabilisation in China PMIs, the risks are starting to look
asymmetric with the recovery looking increasingly priced in. In particular, we worry about
the following:
■
Policy response:
There has been only a limited policy response so far to turn around
growth. Fiscal easing looks set to be around 1% of GDP compared with 4% in 2015
and 10% in 2008/09. While total social financing has accelerated for the first time since
September 2017, our economists' credit impulse measure (TSF plus bond swaps
minus equity issuance) is indicating only a small rise on a 3-month annualised basis,
as shown in the chart below (see
China: Credit allocation to private sector firms
improving, but more policy support needed
, 15 February 2019).
20 February 2019
Global Equity StrategyFigure 2: Production momentum could stabilise in mid-2019
Source: Credit Suisse Economics forecasts, CEIC
Local government bond issuance picked up sharply in January (with a RmB1.36trn
allocation for Q1), as shown in the second chart below, but this is still at only normal
levels. The problem is that nearly 20% of total lending is done by the shadow banking
system (with the private sector disproportionately reliant on such lending flows), and this
portion of lending has been slowing at a rate of more than 10% year on year, though the
pace of the slowdown moderated slightly in January.
Figure 3: Non-bank lending (LHS) has risen only
marginally in the past month. TSF has first
acceleration since Sept 17 (RHS)Figure 4: Government bond issuance has picked up
9%
10%
11%
12%
13%
14%
15%
-12%
-7%
-2%
3%
8%
13%
18%
23%
28%
33%
Jan-16Jul-16Jan-17Jul-17Jan-18Jul-18Jan-19
Off balance sheet lending
Corporate bond growth
Bank loan growth, rhs
TSF growth, rhs
% chg Y/Y2000
4000
6000
8000
10000
12000
Feb-15Nov-15Aug-16May-17Mar-18Dec-18
Local government bond issuance, RMB bn
Source: Refinitiv, Credit Suisse researchSource: Refinitiv, Credit Suisse research。