20181107-招商证券_香港_-US_Midterm_Election__Rebalance_of_Power_5页_618kb

Summary of US Midterm Election Strategy Report

Core Content

This strategy report analyzes the impact of the 2018 US Midterm Election on global markets, particularly focusing on the US-China trade relationship, market valuations, and investment implications. It highlights how the election results could influence policy directions, investor sentiment, and sector performance in the short and medium term.

Key Election Results

• Democrats gained control of the House of Representatives, while Republicans retained their Senate majority.
• Democrats' control of the House may provide more bargaining power or act as a check and balance on the Trump administration's policies.
• Republicans' continued control of the Senate suggests that trade policy with China is unlikely to change dramatically in the medium term.
• Both parties are against the trade deficit with China and intellectual property issues, indicating a potential for bilateral solutions rather than escalation.

Market Implications

• The market uncertainty related to the US election is expected to ease after the results are finalized.
• HSI and MSCI China trade at forward P/E of 10.9x and 11.7x, respectively, aligning with 5-year median levels.
• A mild rebound in Q4 is anticipated due to policy easing in China, the completion of the US election, and undemanding valuations.
• Cyclical sectors such as banks, property, and materials/machinery are expected to benefit the most from the positive signals.
• Pharmaceuticals may recover after a significant valuation correction.
• Selective large consumer stocks could attract investor interest.
• The technology and airline sectors remain cautious due to potential regulatory risks and economic uncertainty.

Liquidity and Investment Flow

• Net inflow via Stock Connect to the Hong Kong market resumed in September, with HKD6.5bn and HKD9.2bn recorded in September and October respectively.
• Northbound Stock Connect saw a record net inflow of RMB25bn in the first four days of November, indicating increased overseas interest in Hong Kong stocks.
• Fund outflow from major Asia emerging markets accelerated in October, with USD35.5bn outflow recorded YTD.
• US dollar strength and rising US Treasury yields are key factors behind the outflow.
• The attractive valuations and potential increase in MSCI index weight are positive signals for Hong Kong stocks.

Key Risks and Catalysts

Key Risks:

• Tighter than expected policy in China.
• Higher than expected USD strengthening.
• Escalating US-China trade war.
• Spread of issues in emerging markets.
• Pullback of the US market.

Key Catalysts:

• China's easing policy.
• Bilateral solution between the US and China.
• Weakening of USD.

Investment Ratings

Industry Ratings:

• OVERWEIGHT: Expect the sector to outperform the market over the next 12 months.
• NEUTRAL: Expect the sector to perform in-line with the market over the next 12 months.
• UNDERWEIGHT: Expect the sector to underperform the market over the next 12 months.

Company Ratings:

• BUY: Expect the stock to generate 10%+ return over the next 12 months.
• NEUTRAL: Expect the stock to generate +10% to -10% return.
• SELL: Expect the stock to generate loss of 10%+.

Conclusion

The US Midterm Election results suggest a rebalance of power, with Democrats gaining control of the House and Republicans retaining the Senate. This shift is expected to reduce market uncertainty, with positive signals for cyclical sectors and potential for market rebound in Q4. The US-China trade relationship is anticipated to ease somewhat, although tensions remain. The Hong Kong market is gaining interest from overseas investors, supported by attractive valuations and potential MSCI index inclusion. Investors are advised to remain cautious due to key risks, while catalysts such as China's policy easing and USD weakening could drive positive market movements.