Having warned about valuation and macro dangers in Chinese fairness markets simply earlier than they crashed in February final yr, the chief Asia and rising markets strategist for Morgan Stanley thinks it’s too early to name a backside. His warning stands in distinction to Goldman Sachs Group Inc. and others, whose strategists anticipate double-digit positive factors in Chinese shares this yr.
“How much longer, or further, can this bear market go?” Garner stated in a Jan. 11 interview with Bloomberg News, citing threats from the omicron variant in addition to rising U.S. rates of interest. “Our judgment is we’re getting closer to the end, but unfortunately, we think that further de-rating of the growth part of China and emerging markets is likely.”
His year-end targets for Hong Kong’s Hang Seng Index and the mainland’s CSI 300 Index are at 25,000 and 5,250 respectively, suggesting little upside for the previous and almost 10% acquire for the latter as of shut of commerce Friday.
Chinese shares began 2022 on a constructive word following final yr’s tumble, as traders guess the worst of Beijing’s regulatory crackdowns have been over and hoped financial coverage easing would add tailwinds.
The Hang Seng China Enterprises Index has superior greater than 6% up to now in 2022, outperforming the S&P 500 Index which had misplaced nearly as a lot as of Friday in Hong Kong. That divergence was partly pushed by the People’s Bank of China’s pledge to take extra motion to prop up the economic system, whereas the Federal Reserve has made it clear that rate of interest hikes will begin in earnest from March.
However, to Garner, the falling return on fairness for Chinese corporations and property defaults are still of concern. The ROE for the MSCI China Index peaked throughout the 2007-2008 cycle at 18% and is at present at 12%, in line with Morgan Stanley.
Here are highlights from the interview with strategist and writer Garner, 56, as he discusses market views and his experiences overlaying the market.
What are the important thing indicators you’re watching to resolve on the turning level for the market?
It comes right down to earnings, valuations and technicals, however in the end we’ll most likely want extra coverage stimulus from China. We’re additionally looking forward to the property sector’s developments, and this world de-rating of development shares and the way that unfolds.
Have you confronted shoppers’ skepticism about your calls provided that valuations have come down rather a lot?
Yes, there’s been plenty of energetic debate. It’s true that each absolute and relative valuations have develop into way more cheap than a yr in the past, however we’re additionally watching the sort of points like — What are you paying for right here? What’s the development in company return on fairness? In China, sadly, company return on fairness is falling in each absolute and relative phrases.
What made you flip bearish on Chinese shares in January final yr?
Our earnings mannequin was displaying vital dangers to the bottom-up consensus, each in China and rising markets. China was buying and selling at nearly two normal deviations in comparison with the medium-term historical past.
We knew some huge cash had come into the market in a short time, but it surely had pushed valuations to an extra. And it was premised on macro and earnings outlooks that we didn’t consider in. We argued in November that we have been still not but on the backside of the earnings cycle.
What’s your boldest name about markets proper now?
I feel it will be that long-term name in regards to the “financialization” of financial savings. As Asian traders transit out of portfolios which can be financial institution and property-centric to proudly owning securities, there’s a multi-trillion greenback funding theme, which is simply simply starting. And it’s not only a China story. Asian traders will drive Asian markets, and personal mutual funds, non-public fairness and hedge funds.
How has the China story modified because you’ve been overlaying this market?
China has moved from being marginal in world investor debates to being central. When I used to be writing analysis notes after which the guide, “The rise of the Chinese Consumer”, in 2005, many traders have been very skeptical. They couldn’t conceive that Chinese customers would develop into as essential, if not much more essential, for sectors and corporations as these within the superior economies.
Do you contemplate your self a lifer in Hong Kong?
I feel the longer term is extraordinarily vibrant for the world that I work in — which is the financialization of financial savings right here in Asia — and Hong Kong is a good place to do it. In this business, together with right here in Hong Kong, we’ve got a real dedication to variety and inclusion.
At Morgan Stanley, we’ve seen a rising development of feminine illustration on the agency stage. Our illustration of girls in senior roles has elevated by a 3rd since I began working at Morgan Stanley.
When have been probably the most susceptible moments in your profession?
I used to be most likely probably the most susceptible early on within the Asian and Russian disaster in 1997-98, once I was simply getting going. And once more, throughout the world monetary disaster, I made a really visibly incorrect name that Asian markets may decouple from the subprime downside within the U.S.
Asian markets in the end got here again very strongly according to my view. Right on the finish of 2008 when the well-known 4 trillion yuan stimulus package deal was introduced, I used to be really in Beijing. I bear in mind being very excited, seeing that and realizing what that might do for the market in 2009.