China’s economic growth speedbump, Rio Tinto swoops on copper-gold

Co-written by Market Strategists Jessica Amir in Australia and Redmond Wong in Hong Kong

What’s happening in equites that you need to know?

• Today in Australia, the benchmark ASX200 fell 0.6%, erasing half of yesterday’s rise of 1.2%. As for the big picture, The Aussie market is searching for direction, and has tracked sideways for 3-months now, awaiting the next big catalyst. Markets need certainty to rise and when it comes to the central banks, markets are still in the dark and want to price in how many rate rises will be made in the US, and in Australia. And given profits will be squeezed when rates rise, money has continued to come out of tech with tech stocks down 25% this year and instead go into energy (oil, gas and coal) stocks , that are collectively up 19%. Today the Australian Bureau of Statistics alluded to company’s profit growth being squeezed, from Omicron, higher wages and oil prices. Just imagine what will happen to companies that were born from almost zero interest rates, if interest rates rise 4 times? Ouch. This is why we advocate for investors to reduce their exposure to tech, and continue to favour commodities, given lack of supply and rising demand overtime.

• What else to know today on the ASX? Investors are readying their portfolios ahead of the new interest rate rising cycle, so traders and investors are buying stocks will benefit from this, like Insurance Australia Group (IAG), Suncorp (SUN), and Bendigo and Adelaide Bank (BEN), with their shares up 3% or more each today. Secondly, amid fears of another slowdown in China, commodities linked to economic growth like oil, copper, iron ore have continued to fall. Take, iron ore junior company Champion Iron (CIA), as an example. CIA shares fell 9% today after the iron ore price fell 5% in two days. Interestingly, CIA is the only ASX Iron Ore company that is covered as a BUY stock by all of the 14 stockbrokers who have researched the company.

• In a sign of the time, in company news, last night, Rio Tinto (RIO) made a $2.7 billion takeover offer for NYSE’s Turquoise Hill copper-gold mine, valuing its shares at C$32 (that’s a 32% premium to its prior close). At Saxo, we also think clients should have exposure to GOLD ahead of interest rate rising, given gold and gold stocks rally, and have rallied every rate rise cycle since 1972. Long-term we also think Copper should bode well given the pivot to carbon neutrality with copper being essential in electric vehicles and modern housing.

• In Asia today, Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) continued to slide after yesterday’s meltdown in Chinese equities, with Chinese tech giants bore severe blows. After plunging 11% yesterday, Hang Seng TECH Index (HSTECH.I) fell another 5% this morning to make another new low not seen since August 2019. Heng Seng Index and CSI300 were down again 4% and 2% respectively in early trading.  Northbound outflows from A shares and massive selling in ADRs and Hong Kong listed Chinese companies have intensified since last week and turned into panic selling yesterday.  A series of bad news, the renewed market concerns about the potential risks of speeding up the U.S. imposed Chinese ADR delisting, weak credit data in February, Shenzhen lockdown and heighted risks of spillover of risk aversion against Chinese assets in view of Chinese ambiguous neutral stance but perceived close association with Russia.  In Singapore, the Straits Times Index (STI) was resilient in the midst of turmoil in other markets.  January unemployment rate fell to 2.3%.  Investors are expecting that Singapore will be able to navigate the geopolitical tension and energy crisis relatively smoothly.  Straits Times Index was up over 3% in 2022 and was steady in this week’s trading. 

• In the US, the S&P 500 (US500.I) and Nasdaq 100 (USNAS100.I) are poised to open lower on their Tuesday by 0.7% and 2% respectively ahead of the US Federal Reserve meeting, with the US central bank expected to rise rates by 0.25%.

What you need to consider

• After China announced plans to cut its coal import reliance, the Australian Government announced it’s working to form a free trade agreement with India. There are expectations the two nations will form a deal this week, which means Australia could divert its coal exports there.

• In Asia, contrary to market expectations, the People’s Bank of China (PBOC) kept its policy unchanged.  10-year Chinese Government Bond yield rose 3.5bps to 2.795%.  After the much weaker than expected aggregate financing and load data released last Friday, in particular a negative print in new loans to households, mainly mortgages, the market expected the PBOC to cut rates today.  While foreign investors had been buying Chinese Government Bonds in recent years, they were reportedly turned to net seller of US$35 billion worth of Chinese Government Bonds in February. In equities, A shares via Stock Connect registered a net outflow of over US$5.7 billion last week.  Renminbi weakened notably since last Friday, currently trading at 6.38 onshore and 6.40 offshore.  Capital outflows and depreciating pressures on renminbi shall be closely monitored.  While the Hong Kong dollar spot weakened to 7.83 vs U.S. dollar, the USDHKD forward curves were stable.  12-month USDHKD forward trading at -256, showing no sign of stress on the linked-exchange rate. 
  
  

Trading ideas

• We remain cautious towards the Hong Kong and Chinse stock markets.  Weak credit growth, COVID lockdowns and fear of deceleration in the growth momentum of export are going to keep a negative tone in the market, apart from the volatile external environments.  The potential of additional selling from overseas institutional investments on concerns of China’s COVID measures, regulatory headwinds against tech-giants, ESG (e.g. Xinjiang), China’s ambiguous stance and perceived association with Russia, ADR delisting concerns and so on remains significant.  However, it is also worthwhile to note that for long-term investors, current valuation in quite a number of leading Chinese companies listed in Hong Kong are undemanding and have discounted a lot of risk premiums and derating.

Earnings to watch

Hong Kong & mainland China

• Mar 15: China Yongda (03669), Shimao Services (00873)
• Mar 16: CK Intrastructure (01038), Evergrande Services (06666), Kingdee (00268), Powerlong Commercial (09909)
• Mar 17: China Telecom (00728), CK Hutchison (00001), Fuyao Glass (03606), Powerlong Real Estate (01238)
• Mar 18: China Merchants Bank (03968), China Molybdenum (03993), Ping An Insurance (02318), Sunac Services (01516)

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