2025-01-13
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A fragile bull market under the weight of rates and currency Chinese equity picked up on hopes of government stimuli and the so-far-so-good impact on the economy. But this is overshadowed by the prospects of Rmb depreciation under (1) a pause or reversal of US rate cut and (2) a currency response to Trump's Tariff 2.0. Domestic A-shares can ignore but foreign investors must embrace another bout of Rmb depreciation which cuts into their returns. US rates may stay high throughout 2025 As most Trump's policies are inflationary, the prospect of US rate cut is now substantially dimmed. The prospect of a strong dollar is gaining strength. If federal fund rate stays at today's level (4.58%) in 2025, instead of 3.75% as the current consensus goes, it would have cost US government US$300bn of incremental interest payment, or ~4% of US annual government budget. However, if Elon Musk's Department of Government Efficiency (DOGE) successful cut spending by US$500-1,000bn, high interest may not be an immediate issue. Domestic liquidity favours A-and H-share over ADR For domestic A-share investors, currency depreciation is not a direct concern. H-share can benefit from south-bound inflow of spill-over liquidities. Buy high dividend stocks to offset the currency impact Since HK dollar is pegged to the US dollar, HKSE stocks can mitigate the currency loss, but cannot offset the earnings risk of a weak functional currency. Investors can look for additional return of a high dividend yield and/or active buybacks to compensate. In our universe, Vipshop, Alibaba and JD.com are the top three high-dividend+active-buyback HKSE stocks to own. Exhibit 10 shows the ranks. |
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