Having warned about valuation and macro dangers in Chinese language 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 good points in Chinese language shares this yr.
“How for much longer, or additional, can this bear market go?” Garner mentioned in a Jan. 11 interview with Bloomberg Information, citing threats from the omicron variant in addition to rising U.S. rates of interest. “Our judgment is we’re getting nearer to the top, however sadly, we expect that additional de-rating of the expansion a part of China and rising markets is probably going.”
His year-end targets for Hong Kong’s Hold 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% achieve for the latter as of shut of commerce Friday.
Chinese language shares began 2022 on a optimistic be aware following final yr’s tumble, as buyers guess the worst of Beijing’s regulatory crackdowns had been over and hoped financial coverage easing would add tailwinds.
The Hold Seng China Enterprises Index has superior greater than 6% to date in 2022, outperforming the S&P 500 Index which had misplaced virtually as a lot as of Friday in Hong Kong. That divergence was partly pushed by the Individuals’s Financial institution 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.
Nevertheless, to Garner, the falling return on fairness for Chinese language firms and property defaults are nonetheless of concern. The ROE for the MSCI China Index peaked in the course of the 2007-2008 cycle at 18% and is at the moment at 12%, based on Morgan Stanley.
Listed below are highlights from the interview with strategist and creator 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 all the way down to earnings, valuations and technicals, however finally we’ll most likely want extra coverage stimulus from China. We’re additionally expecting the property sector’s developments, and this international de-rating of progress shares and the way that unfolds.
Have you ever confronted purchasers’ skepticism about your calls provided that valuations have come down so much?
Sure, there’s been a lot of lively debate. It’s true that each absolute and relative valuations have grow to be much more cheap than a yr in the past, however we’re additionally watching the type of points like — What are you paying for right here? What’s the pattern 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 language shares in January final yr?
Our earnings mannequin was exhibiting vital dangers to the bottom-up consensus, each in China and rising markets. China was buying and selling at virtually two commonplace 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 imagine in. We argued in November that we had been nonetheless not but on the backside of the earnings cycle.
What’s your boldest name about markets proper now?
I feel it could be that long-term name in regards to the “financialization” of financial savings. As Asian buyers transit out of portfolios which might be financial institution and property-centric to proudly owning securities, there’s a multi-trillion greenback funding theme, which is just simply starting. And it’s not only a China story. Asian buyers will drive Asian markets, and personal mutual funds, personal fairness and hedge funds.
How has the China story modified because you’ve been overlaying this market?
China has moved from being marginal in international investor debates to being central. After I was writing analysis notes after which the guide, “The rise of the Chinese language Shopper”, in 2005, many buyers had been very skeptical. They couldn’t conceive that Chinese language customers would grow to be as necessary, if not much more necessary, for sectors and companies as these within the superior economies.
Do you take into account your self a lifer in Hong Kong?
I feel the long run is extraordinarily vibrant for the realm that I work in — which is the financialization of financial savings right here in Asia — and Hong Kong is a superb place to do it. On this trade, together with right here in Hong Kong, now we have a real dedication to range and inclusion.
At Morgan Stanley, we’ve seen a rising pattern of feminine illustration on the agency stage. Our illustration of ladies in senior roles has elevated by a 3rd since I began working at Morgan Stanley.
When had been essentially the most susceptible moments in your profession?
I used to be most likely essentially the most susceptible early on within the Asian and Russian disaster in 1997-98, after I was simply getting going. And once more, in the course of the international monetary disaster, I made a really visibly unsuitable name that Asian markets may decouple from the subprime downside within the U.S.
Asian markets finally got here again very strongly consistent with my view. Proper 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 would do for the market in 2009.