China Market outlook

Inflation Report – China

• Economic Outlook: China’s inflation has been moderate, with August CPI inflation rising to 0.6% YoY, slightly below market expectations. However, deflationary pressures remain a concern as core inflation fell to 0.3% YoY. Producer Price Index (PPI) inflation also declined, further reflecting the challenges in China’s industrial sectors.

Key Insights:

1. Rising Deflationary Pressures: Slower growth in core CPI and a fall in PPI inflation point to weak demand in the Chinese economy. This is primarily driven by global commodity price declines and weak domestic consumption.
2. Policy Implications: Analysts expect more active fiscal policies from the government to combat deflationary risks. The continued easing of monetary policies alone may not be enough to revive the economy, and fiscal interventions such as infrastructure investments will be crucial.

Investment Impact:

• The inflation report signals mixed outcomes for various sectors. Sectors tied to consumer goods may see slower growth, while industries benefiting from government infrastructure spending, such as construction and utilities, could outperform.

Construction Sector – China

• Sector Outlook: MARKET WEIGHT China’s construction sector is poised for growth, driven by macroeconomic policies aimed at boosting infrastructure investment. The government’s policies, introduced in 2H24, include stronger fiscal support and targeted efforts to stabilize the property market.

Key Highlights:

1. Fiscal Support Driving Infrastructure Investment: China’s commitment to long-term infrastructure development is expected to drive demand for construction services. The issuance of ultra-long treasury bonds and local government special bonds will support this initiative.
2. Property Market Stabilization Efforts: The government’s comprehensive policy to increase housing demand and reduce inventory levels is a key factor that could stabilize the property market. This, in turn, will support the construction sector, which is closely tied to property and infrastructure investments.

Valuation and Risks:

• The construction sector’s growth is heavily dependent on the successful implementation of fiscal policies and property market stabilization. Slower-than-expected progress could impact sector performance.

Internet Sector – China

• Sector Outlook: MARKET WEIGHT China’s internet sector delivered a mixed performance in 2Q24, with companies generally beating earnings expectations despite a subdued macro backdrop. The 2H24 outlook remains promising, driven by key catalysts such as shareholder returns, cross-border expansion, and easing competition.

Key Insights:

1. Online Gaming Resilience: Companies like Tencent and NetEase showed strong performance in their gaming divisions, with double-digit grossing growth driven by popular titles.
2. E-Commerce Challenges: Despite positive results from some companies, the e-commerce sector faced intense competition. Alibaba and JD saw modest growth, while Pinduoduo (PDD) experienced weaker visibility in revenue and earnings growth due to increased investments.
3. Catalysts for 2H24: The recovery of service-oriented consumption (e.g., online travel and local life services) is expected to drive growth in 2H24. Additionally, government support for technology and content development could boost the sector.

Valuation and Risks:

• Valuation repair in the internet sector is expected to be gradual, with the sector’s competitive landscape remaining challenging. Risks include weaker-than-expected consumer demand recovery and increased competition among e-commerce platforms.Thank you