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Strategy "First Step Away from Bear: Domestic Demand Outlook and IR Cut
Pls see attached the full PDF research report, below is a highlight:
Investment highlights:
¨ Outlook for Chinese economy and stock market depends on whether state policies can stimulate domestic demand. The financial crisis has depressed the world economy to the brink of recession, fueling concerns about deflation. Hence, external demand for Chinese exports is expected to remain weak. The Chinese government has issued a variety of expansionary policies to deal with impacts from the worsening global economic environment. These include expansionary fiscal policies and three interest rate cuts within 45 days. Our macro team expects rates to be cut a further 216bp within the next 12 months.
¨ Real estate is a key part of domestic demand. Continued IR cuts could raise home affordability to the 2003~2005 level. Rate cuts and new real estate policies could help ease the tension in the property market. Our calculation shows that the monthly mortgage repayment/household income ratio in major cities would return to the 2003~2005 level if interest rates are cut by 216bp over the next 12 months, household incomes grow 5%, and home prices decline by just 5%. The rent yield in main cities has also gradually exceeded deposit interest rates. In addition, unlike advanced economies, the demand for homes in China still has sizeable growth potential.
¨ Actualization of latent demand for property depends on home affordability. Prospects better in second- and third-tier cities. Real estate sales volume shrank more significantly YoY in cities with lower home affordability indices YTD. For example, sales GFA fell almost 30% YoY in twelve major cities that account for 29% of the country’s total property sales. By contrast, property sales in other parts of the country declined by just 11%, much better than major cities. Property sales volume did not fall much in southern cities with declining home prices, indicating that improved home affordability is helping demand to recover.
¨ Can the real estate industry cushion the economic downturn? Historical data from overseas markets show that the real estate industry can help buffer an economic downturn when interest rates are being cut. For example, significant rate cuts boosted the real estate market and hence prevented severe economic recessions in the US after the dot-com bubble and in Japan after the Plaza Accord. Furthermore, our analysis shows that non-property household spending is insensitive to rate cuts, and government spending still has significant upside potential, which would also stimulate domestic demand.
¨ Real estate stocks may be the first to bottom out if the property market stabilizes due to deep rate cuts and declining home prices. Historical data suggest that stock markets decline for 5~8 quarters along with an economic down-cycle. We studied performance of H-shares/red chips and US/Japanese stocks while interest rates were being cut, and found that stock markets plummeted along with rapid rate cuts in the early stages of an economic downcycle, but the decline moderated or bottomed out when rate cuts became milder and slower. China’s stock markets have plunged as rates have been cut since September. Stock valuations (notably H-shares and red chips) have dropped to or below their historical range bottoms. Despite further downside risks for valuations and earnings, the market may gradually offer long-term investment value as rate cuts continue.
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发表于 2008-11-13 10:03
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