16 July 2020 |

CIO Weekly – Featuring BNP Paribas WM’s Prashant Bhayani

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This week: BNP Paribas sees high single to low double digits return for equity market; Pictet’s Pérez Ruiz upbeat on China, says more guidance needed for 2Q20 earnings; Standard Chartered Private Bank: Rally in Asia and China equities has more upside; Bank of Singapore is positive on Hong Kong stocks; UBS GWM expects India’s e-commerce to grow 17.3% over next decade

BNP Paribas sees high single to low double digits return for equity market

As risk assets keep trending higher, BNP Paribas Wealth Management believes that a high single to low double digits return for equity can be expected in the medium term.

Prashant Bhayani, CIO, Asia for BNP Paribas Wealth Management told Asian Private Banker that the bank started to recommend that investors add to equity exposure in March 2020.

“In the short-term, market consolidation is likely and would be healthy, especially in technology and related sectors,” he said. “Risks include a second wave that lead to country shutdowns, US elections, or a breakdown of the Phase 1 trade deal. Upside risks include an effective vaccine before the end of the year where progress seems to be advancing.”

“The narrowness of the rally requires broadening into some value sectors in order to sustain higher equity levels. We see moderate upside in the high single digit to low double digits in the medium term. Importantly, this would outperform our expected returns for fixed income.”

The bank attributed the recent equity recovery to three main reasons: extraordinary policy response, faster than expected economic re-opening and high cash positioning.

On geography, US and Asia have been leading the recovery with Europe lagging behind. Bhayani explained that year to date, technology and related companies have been driving market returns and the European index weighting in information technology is less than 8%.

“However, Europe has a higher weighting in value sectors which, in performance and valuation, are at historical lows vs. growth sectors. In addition, European lockdowns were effective and that could help the domestic recovery.”

“We are already seeing the euro appreciate which is within our expectations, reflecting improving capital inflows to Europe.”

Pictet’s Pérez Ruiz upbeat on China, says more guidance needed for 2Q20 earnings

The latest frenzy in China’s equity market appeared more sedated in the days past, after authorities in Beijing stepped in to remove high leverage trading. Despite recent corrections, César Pérez Ruiz at Pictet Wealth Management said Chinese valuations remain “reasonable” compared to their Western peers.

“Stock market optimism is nowhere more evident than in China, with the MSCI China rising a hefty 7.5% last week,” commented the head of investments & chief investment officer, reminding investors of the fervour among Chinese retail investors during 2014-2015, before a meltdown took place, and a bull market soon became a bear.

But he noted that the circumstances in 2020 have been very different: “We think the fundamentals are better this time. To begin with, China has a head start in terms of its economic recovery — we expect real GDP growth of 1.2% this year.”

“In addition, borrowed money in the stock market is well below 2015’s peak — and the People’s Bank of China is already withdrawing liquidity from the financial system to limit speculation.

Pérez Ruiz said the bank remains upbeat on China, “seeing it as the best option for emerging-market investments”.

Standard Chartered Private Bank: Rally in Asia and China equities has more upside

As risk sentiment improves, Standard Chartered Private Bank believes the current rally of Asia ex-Japan and China equities has more upside.

Since February, the bank has been upbeat on China onshore and offshore markets within Asia, and since then China onshore and Asia ex-Japan equities have returned 22% and 7.5% vs. 6.2% for global equities, the bank pointed out.

China has been successfully reopening its economy after lockdowns without a major resurgence of infections. An overall return to growth in 2Q20 is well ahead of other major economies, the bank said, adding that policymakers’ pledge to quicken credit growth and support infrastructure spending will lift domestic liquidity and serve as a driver of recovery.

The bank considered as an additional positive “the prospect of more US-listed Chinese companies (ADRs) relisting in Hong Kong, driving mainland [China] flows”.

“Historically, liquidity-driven rallies in China have lasted for months. There is little sign of euphoria yet — our investor diversity indicator is not flashing red and margin financing remains below 2015 levels.”

Bank of Singapore is positive on Hong Kong stocks

As markets recover from the COVID-19 recession and enter the next expansionary cycle, Hong Kong stocks offer attractive risk-adjusted return, according to Bank of Singapore.

“In equities, the Hang Seng Index (HSI) is trading at about 11.2× 12-month forward P/E, which is around the historical average,” the bank said, adding that despite near-term geopolitical uncertainties, the HSI’s valuation appears inexpensive versus the broad market mostly trading near the high-end of its historical range.

“We have an overweight stance on Hong Kong equities, and our latest index forecast for the HSI reflects a base case scenario of 27,330 which points to a 7% upside ahead.”

In addition, the bank believes that the A-share rally has more legs and that the onshore market looks attractive, from a valuation’s perspective.

“At this juncture, the valuation of the onshore A-share market (the CSI 300) appears relatively undemanding versus the offshore market (MSCI China),” it said. “The CSI 300 is trading at 13.7× 2021e P/E, which is at +1.5 standard deviations to its historical average vs. MSCI China at 14.2× 2021 PE, which is well beyond +2 standard deviations above its historical average.”

UBS GWM expects India’s e-commerce to grow 17.3% over next decade

As India has emerged as a key player in global economies, its growing e-commerce market is a particularly promising area, according to UBS Global Wealth Management.

“As one of the world’s biggest consumer markets, international and local players are racing to gain market share,” the bank said. “We forecast a 17.3% average annual expansion rate for the sector over the next 10 years, driven by the youthful population’s embrace of the internet age. In our view, we see growth in India across online retailing, travel booking and food delivery.”

Even so, the bank pointed out, for foreign investors, the challenge with investing in India is not a lack of opportunities. Instead, it is the obstacles hindering foreign investors from tapping the local markets.

“Progress has been made on this front and we expect further financial market reforms, but more needs to be done,” it said. “Still, as a vast and under-owned market, the potential investment rewards can be substantial.”