Investing.com – China’s authorities have introduced several key measures to boost the economy, including reductions in policy rates and reserve requirements, as well as initiatives to lower mortgage rates, especially for first and second homes, analysts at Citi Research said. in the notes.
A new equity market support facility has also been introduced. While some of these moves were expected, such as policy rate cuts and mortgage repricing, others came as a surprise.
In the future 25-50 basis points Cut in RRR and reduction in down payment requirements for the second house caught the market off guard.
These measures, combined with new equity market support mechanisms, have led to a rally in Chinese and Chinese stocks.
Despite this positive market response, Citi economists warn that these policy measures are not enough to reshape China’s long-term growth trajectory.
The core issue remains weak credit demand, rather than liquidity constraints, meaning stronger fiscal support may be needed to significantly alter growth prospects.
“Citi economists therefore maintain China’s growth forecast of 4.7% for 2024E, which means Beijing’s GDP growth target remains at risk,” said analysts at Citi Research.
However, these recent developments have caused the risk balance to shift towards more cyclically sensitive sectors.
In Europe, this change is particularly important for industries that have strong ties to China. European stocks linked to China have come under heavy pressure throughout the year, outperforming both indices.
Key sectors like luxury goods, IT, automobiles, and basic resources have been hit hard as yields fell and prices fell.
Citi analysis shows that earnings expectations for China-sensitive European stocks have been revised down by about 10% for 2024, five times the decline seen in the broader market.
Additionally, the price-to-earnings ratio for the stock has fallen by about 7%, even though the market generally sees the ratio rising. Any stabilization in China could provide relief to the sector, making it a prime candidate for recovery.
An element of Citi’s analysis is a contrasting signal arising from a significant decline in profits. Citi’s proprietary Earnings Revised Index (ERI) for MSCI Europe has fallen by -39%, while the index for the European cycle has fallen further, by -50%.
Historically, such extreme negative readings have often been followed by market rebounds. On average, MSCI Europe’s index tends to rise 13% on the year after falling below -40% in ERI, with cyclical stocks outperforming defensively by around 10% over the same period.
This shows that, despite the new challenges, there may be significant upside potential for the cycle sector in Europe.
Rate cuts, both in Europe and globally, tend to support equity markets, especially outside of a major recession or financial crisis.
Cyclical stocks, in particular, have historically outperformed their defensive peers during periods of monetary easing. As central banks, including the US Federal Reserve, move to a more accommodative stance, the cyclical sector could benefit from a supportive environment.
Furthermore, seasonal trends often choose to cycle towards the end of the year, increasing trading momentum.
Against this background, Citi has adjusted its European sector strategy to reflect a more balanced, or “barbell” approach. While maintaining an overweight position in defensive growth sectors such as technology and healthcare, Citi has selectively increased its exposure to cyclical stocks.
In recent weeks, Citi has upgraded the auto sector to a “neutral” rating, reflecting improved sentiment related to China’s policy support.
In addition, basic resources have also been upgraded to Neutral, as the prospect of stabilization in China begins to revive the outlook for commodities.
At the same time, Citi has reduced exposure to more defensive areas, downgraded food and beverages, and moved telecommunications to an underweight rating, as these sectors are expected to face problems related to an improving cyclical environment.
Citi analysts remain cautious on China’s overall growth prospects, stressing that without more substantial fiscal intervention, the country’s economy could continue to face problems.
However, the recent wave of policy easing, although not transformational, provides a level of optimism that could be useful especially for the European cyclical sector.
