Weekly views from GF Securities’ macro research team【20211004】

AuthorGF Securities' Macro Research Team

Low-valuation sectors to fend off short-term fluctuations
The sell-off in the H-share market was due to the brewing debt crisis in the property sector. We suggest allocating in low-valuation sectors with good sentiment amidst the fluctuations in the short term. The sell-off in the H-share market was due to the concerns over credit supply triggered by the brewing debt crisis in the property sector. Compared with the Lehman incident, we believe the two vary in terms of leverage risk and the two governments' rescue capabilities. Therefore, a spread of risks is unlikely, but how much tolerance the government has remains to be seen. Meanwhile, the future trend of cyclicals will be determined by supply-demand dynamics. We suggest watching the gradual retreat of production restrictions, the developments in the China Evergrande incident and policies to stabilize growth. We suggest allocating in low-valuation sectors with good sentiment amidst the fluctuations: (1) Wind power/construction/securities benefitting from stable domestic demand growth; (2) The aluminum and cement sectors which are seeing a supply-demand gap; (3) New energy (lithium battery materials) and solar energy (silicon materials) industry chains.
Dai Kang, Zheng Kai - Sept 22, 2021

Dual controls, operating rate and the macro economy
Local governments stepped up their controls over energy consumption and energy intensity (“dual controls”) in September for highly polluting and energy-intensive sectors, which should impact industrial data and prices; risks related to supply-demand mismatch should remain in place in 4Q21. Local governments have stepped up their dual controls recently for highly polluting and energy-intensive sectors. As a result, production volume of crude steel, coke, non-ferrous metals and cement declined substantially YoY in August. The lowering operating rate and coal consumption for power generation in September suggest the impact of energy consumption restrictions on highly polluting and energy-intensive sectors has been amplified. More industries may be affected in the short term amid the power restrictions. Supply constraints have led to a decline in industrial goods production, which became a drag on industrial data. It also triggered industrial goods price hikes. However, the lower demand amid the economic slowdown should offset the impact of the short-term short supply. Policies to constrain supply will take into account controls over energy consumption and intensity as well as economic growth. Therefore, policies to constrain and secure supply should co-exist. It is worth noting that fiscal spending will speed up in 2H21, which, together with the upcoming peak season for electricity and coal consumption, could lead to risks related to a supply-demand mismatch in 4Q21.
Guo Lei, He Xiaoshu - Sept 24, 2021

Waiting for an inflection point in upstream profit contribution
Retreat in profit growth can be explained by decline in production volume and profit margins. We suggest watching for an inflection point in upstream profit contribution and macroeconomic factors. Profit growth at industrial firms slowed in August, a result of a faster decline in industrial production and weaker support from profit margins. The retreat in profit growth can be explained by looking at three factors: volume, price, and profit margins. YoY growth in industrial value-added slowed amid COVID cases in some regions and energy controls. Meanwhile, revenue appeared stable, partly due to a continued rise in PPI. However, profit growth in manufacturing diminished on upstream price hikes. Industries that saw improvements in profit growth include (1) those hindered by upstream supply, (2) those benefitting from the pandemic, and (3) the textiles & apparel industry chain. We have seen passive restocking at industrial companies. Passive restocking corresponds to stagflation and active destocking indicates a recession. We suggest watching for an inflection point in upstream profit contribution, and marginal changes in major macroeconomic factors including inflation, COVID-19 and exports. As profit growth has slowed after peaking at the start of the year, and production expansions should be restricted by the controls over energy use, companies' leverage ratios may continue to decline, but this will be determined by profit resilience within the year.
Guo Lei, Wang Dan - Sept 29, 2021

Takeaways from the PBoC’s 3Q21 meeting
The PBoC indicated a more cautious view on the economy. We did not expect a drastic policy turn but simply anticipatory fine tuning. Politburo meetings should provide more guidance. The People's Bank of China’s (PBoC) indicated a more cautious view on the economy at its quarterly meeting, which emphasized the importance of serving the real economy and stabilizing credit growth. To this end, the central bank proposed three methods: (1) using the newly-allocated relending quota to increase lending to micro, small and individually-owned businesses; (2) encouraging banks to replenish capital; (3) lowering actual lending rates. In addition, the statement related to carbon emissions tools gave more details, which indicates that they may be rolled out soon. Meanwhile, the central bank added that “we should strengthen coordination among fiscal, industrial and regulation policies”. We expect the central bank to expand liquidity supply appropriately in 4Q21 to accommodate an increase in government bond issuance and the impacts of reducing energy consumption intensity and quantity. Moreover, the central bank is paying extra attention to property-related risks. We do not rule out the possibility of financial policy fine tuning, but the principle of “homes being for living in and not for speculation” remains essential. Overall, the PBoC reiterated the policy framework stated at its previous meetings. The Politburo meetings in late October and early December should provide more guidance.  
Guo Lei, Zhong Linnan - Sept 28, 2021

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