Mainland Chinese shares stumbled again on Monday, extending losses following the worst week since October.
Over the weekend, Beijing said industrial firms’ profits jumped 13.9% in March, rebounding from a January-February slump. That reinforced the notion that authorities may deploy less stimulus going forward as the economy stabilizes.
That “good news is bad news” dynamic has conspired with profit taking and earnings disappointments to take the wind out of A-shares’ sails. On Friday, we noted that the Shanghai Composite was on track for its worst week relative to the S&P since 2016. The same is true for the SHCOMP versus global equities (top pane). The ChiNext fell 2.6% on Monday and is now riding a pretty painful three-day losing streak (bottom panel).
Monday was particularly rough for brokerages. Haitong and Citic were crushed on apparent concerns about the extent to which a pullback in Mainland shares will lead to lower trading volumes going forward.
If you ask Goldman, it’s time for H-shares to catch up.
“While HK/H shares have moderately outperformed the regional and EM benchmarks YTD, they have meaningfully trailed their Mainland peers which have rallied ~30% so far this year”, the bank wrote Sunday, adding that “the last time that H shares underperformed A by more than 15pp was in 2015, a 1.5 sigma event.”
(Goldman)
Goldman goes on to cite what the bank calls a trio of “necessary conditions” for a catch-up phase for H-shares. They are:
- Consolidating A shares: A combination of strong ytd gains, moderating easing expectations amid recovering macro growth, regulatory oversight on financial leverage, and already-improved investor positioning may slow the uptrend in A shares. Historically, a range-bound China A was conducive to H shares.
- A supportive global markets backdrop: A dovish Fed should bode well for global market liquidity, and a robust US equity market, underpinned by record buybacks, should benefit HK given the high proximity between the two markets.
- Improving fundamentals: China growth should stay firm in 2Q post the upside surprises in 1Q; the EPS downgrade cycle has inflected and credit impulse points to further recovery ahead. HK usually trades earnings more than A shares.
With those three conditions met, Goldman says A-share “FOMO” may well spill over into H-shares, which are often considered a kind of “plan B” (and yes, Goldman thinks the alphabet soup there is pretty clever). It’s worth noting that the A/H premium is now back above the 10-year average and sits at a 38-month high.
(Goldman)
H-shares lagged the CSI 300 by the most on quarterly basis since 2014 in Q1. On Monday, the SHCOMP closed below its 50-day moving average.
Draw your own conclusions.
