Citigroup's China equity strategist Liu Xianda stated that the bank has revised its year-end target for the Hang Seng Index from the earlier 30,000 points down to 29,600 points. The target for the first half of 2027 is set at 30,500 points. The bank also noted a 1.3% reduction in its year-end 2026 target for the index due to a 0.4 percentage point downward adjustment in the expected earnings per share growth for the Hang Seng Index in 2027, now projected at 11.9%.
The strategist indicated that the bank has upgraded its rating on the insurance sector from "Neutral" to "Overweight," anticipating that the equity market will generate increased investment returns and that inflows from bank deposits into insurance products will provide further upside potential.
The bank maintains its "Overweight" rating on the technology sector and has raised its weighting for the MSCI China technology segment by 1.5% to 12%. It expects robust earnings growth in sub-sectors such as semiconductors and communication equipment, as they are beneficiaries of capital expenditure.
Regarding the basic materials sector, the bank continues to hold an "Overweight" rating. For the internet sector, despite lowering its weighting by 5.3% to 36.5% due to a slowdown in earnings growth, the bank maintains its "Overweight" rating, primarily citing its low valuation.
For the financial sector, the bank increased its weighting by 1.6% to 12.1%, mainly driven by a more optimistic outlook on brokerages, considering Hong Kong's strong IPO pipeline and expectations of sustained high trading volumes in major equity markets.
The bank has also raised its year-end target for the CSI 300 Index from the earlier 5,100 points to 5,600 points, with a target of 5,700 points projected for the first half of 2027.
Liu Xianda expressed a preference for A-shares over H-shares, citing the higher weighting of technology stocks. The bank is optimistic about the technology sector in the second half of 2026, expecting strong capital expenditure to drive significant earnings growth as a primary growth driver, thus favoring indices with a greater proportion of technology stocks. The technology sector weighting in the CSI 300 Index is 15.7%, significantly higher than the 3.7% in the Hang Seng Index. Consequently, the bank anticipates that the CSI 300 Index will outperform the Hang Seng Index in the second half of 2026. However, given that many A-share technology and high-growth companies are actively applying to transfer to H-shares, the gap between the two may narrow within the next 12 months.
Addressing the China Securities Regulatory Commission's crackdown on illegal cross-border operations by overseas brokerages, Liu noted that recent regulatory actions against three securities firms by mainland authorities are not sudden events. Regulations have been in place over the past five years, and current enforcement is a formal implementation of existing policies; the principles remain unchanged, and this does not affect the bank's positive view on the brokerage sector.
In the preferred buy list for H-shares, the bank includes Tencent (00700), AIA Group (01299), Hengrui Medicine (01276), MMG (01208), Trip.com Group (09961), China International Capital Corporation (03908), Montage Technology (06809), and ASMPT (00522).
The strategist pointed out that the bank has replaced two hardware companies with two semiconductor firms—Montage Technology and ASMPT—as semiconductors are the most favored sub-sector within technology. Additionally, Zijin Mining (02899) has been replaced with MMG, as the latter is expected to have greater upside potential after outperforming Zijin Mining.
In the preferred sell list for H-shares, the bank includes Huaneng Power International (00902), China Resources Power (00836), Huishang Bank (03698), BYD Electronic (00285), Sociedade de Jogos de Macau (00880), Chervon Holdings (02285), and China Resources Medical (01515).
Comments