Mainland China's A-shares market is expected to deliver a better return than Hong Kong's H-shares after the People's Bank of China announced a 40bp cut in the benchmark one-year lending rate to 5.6% and a 25bp cut in the benchmark one-year deposit rate to 2.75%, the first interest rate cut (IRC) by the central bank since 2012, says Raymond Chan, chief investment officer, equity Asia-Pacific of Allianz Global Investors.
Three reasons were cited: First, A-shares have cheaper valuation; second, in previous years, Chinese corporates generally have high capital expenditure (capex), but as China's growth is slowing down and cost is decreasing, corporates are reducing their capex, resulting in a more positive cash flow; third, the IRC creates better liquidity, and after the property sector correction, the liquidity is more likely to go to the capital market, Chan explains.
Interest rate-sensitive sectors will benefit from the IRC, he adds. Securities companies will gain the most, followed by insurance and property sectors. Banks are deemed a two-fold story, the imbalanced interest cut may further negatively impact their net interest income. However, non-performing ratio pressure may be eased by the lending rate reduction, which Chan calls a positive.
He expects the PBoC to launch another interest rate cut next year, albeit gradually, while a quick or significant IRC will be bad for the renminbi.
Globally, the asset manager maintains its positive view towards global equities versus global bonds. It remains overweight in US, slight overweight in Japan, neutral to Hong Kong/China, neutral to overweight in continental Europe while underweight in the UK.
It is gradually increasing its portfolio exposure in Asia, where risk reward is beginning to look more attractive. In terms of sector, it is overweight in telecom services, industrials, technology and health care while underweight in consumer staples and materials, introduces Elvin Yu, Allianz Global Investors' head of institutional business, Greater China and Southeast Asia.
