CICC Issues 2H21 Macroeconomic & Strategy Outlook Report
(June 17, 2021, Beijing) China International Capital Corporation Limited (CICC, 3908. HK, 601995. SH) is pleased to announce that it held the "Investment Strategy Conference 2H21" yesterday and issued the 2H21 macroeconomic and strategy outlook reports. Dr. Peng Wensheng, CICC's Chief Economist, Head of Research Department and Executive Dean of CICC Global Institute, and Dr. Wang Hanfeng, Chief Strategist of CICC, delivered keynote speeches on the outlook of macroeconomic and A-share market in the second half of the year.
Changing Macro Landscape: A Focus on Supply Constraints
Dr. Peng Wensheng said that the most significant feature in the current economic recovery is the "supply constraints". In traditional economic recoveries, the price rise would push up supply to meet demand. However, the Covid-19 pandemic shock and its ripple effects deteriorate the supply elasticity, and hence the price rise may not necessarily cause a rapid supply expansion. In addition to the supply issues, there are two other differences between this economic cycle and the past; one is the asymmetric impact from the pandemic, and the other is the government's pandemic containment policies.
Dr. Peng Wensheng further analyzed that, against the background of contracting supply elasticity and different demand tensions, the global economy may show three features in the second half of the year: 1) The divergence of global inflation; 2) China's exports strength will continue to be stronger than domestic demand; and 3) Increased volatility in global capital markets.
A-share Strategy: Rotation Back to Growth
Dr. Wang Hanfeng said that economies and markets hit first by the pandemic are also the first to recover and face subsequent policy exit ("first-in, first-out") in 1H21, although complete eradication of the pandemic may take some time ("long-tail"). While the global economy has been recovering as a whole this year, we see structural divergence and different paces of recovery in various economies. This will remain as the primary backdrop for 2H21 asset price outlook. As China took the lead in pandemic recovery and withdrawal of relief policies, we believe that the country may also be the first to enter the "post-pandemic new normal". Major developed economies may continue to recover in 2H21 and gradually start to discuss policy exit. Meanwhile, some emerging markets are still battling the pandemic to achieve economic recovery.
Looking ahead to 2H21, Dr. Wang Hanfeng considered that the impact of the pandemic is not only on the supply side, but also on the demand side. China's consumer demand recovery is currently weak. Many investors were worried about inflation in 1H21, but if aggregate demand is not strong, the market may start to pay more attention to the sustainability of economic growth and marginal policy easing, which may drive the market trend back to growth. Taking into account growth, valuation, policies and overseas markets, we hold a neutral view towards the 2H21 outlook of China market but remain upbeat about structural opportunities. Investors should pay less attention to market indexes but give priority to structural opportunities and growth plays. Following market fluctuations in 1H21, we advise investors to refocus on "new economy" trends, such as industrial upgrading and consumption upgrading.
When it comes to the obvious structural valuation differentiation of the current Chinese market, Dr. Wang Hanfeng said that China's capital market is undergoing historical changes, such as internationalization, new product introduction, the rise of institutional investors, and growing market shares held by leading players. As institutional investors still favor high-quality names, we believe the valuation divergence is probably supported by fundamentals and liquidity conditions, although high valuations may undermine expected returns.