Last month we had a strong preference for cyclicals over growth stocks, but now we expect less contrasting performance in value and growth stocks in coming weeks, because 1) investors are getting used to rise in bond yields; 2) value stocks’ momentum is weakening; and 3) growth stocks have become less frothy.
- Stocks becoming less sensitive to rising bond yields. The surge in bond yields triggered sell-offs in global equity markets since mid-Feb, but correlation between stocks and bond yields has returned to slightly positive. The rise in bond yields may even take a break, giving a breather to stocks.
- Earning season review: cyclicals beat. FY20 annual result season in HK has been a bit disappointing, with FY21E consensus earnings revised down. By sector, cyclicals, particularly financials, brought more positive surprise, while growth stocks such as internet, consumer and healthcare missed.
- Fund flows: Southbound buying remained weak. Southbound buying via Stock Connect has been a major driving force behind the 15% rally in the HSI and 31% rally in the HSTECH earlier this year, but inflows have significantly weakened since mid-Feb. A slump in mutual funds issuance in Mainland China certainly does not help Southbound flows.
- Technical Analysis: growth bottoming out; value overbought. The HSI is at a crossroads, waiting for a breakout of a downward channel. The HSTECH is forming a bullish “double bottom”. By style, value stocks are relatively overbought against growth stocks.
- Rotation to value nearing an end? The daily Relative Rotation Graph (RRG) of the HSCI shows that value sectors are weakening while growth stocks are improving in momentum, which implies this round of sector rotation may be nearing an end.
- Strategy: stock picking is now the key. Favour industry leaders with either 1) better-than-expected FY20 result; 2) promising 1Q21E guidance; 3) upside in consensus earnings; or 4) cheap valuation with turnaround story.
