Introduction

While big questions swirl about China’s macro policy, some sectors are seeing fundamentals shift in their favor. Profits are moving to industrials, consumer discretionary, and staples — and away from materials and energy, according to HSBC.

Reasons for the Shift in Profits

The shift in profits is attributed to falling producer prices and their widening gap with consumer prices in China. This means that upstream businesses are making less money, while costs drop for mid- and downstream companies.

Sub-Sectors with Favorable Conditions

HSBC analysts identified sub-sectors with low inventory levels and strong demand momentum. According to their analysis, home appliances, media, and software sectors are among the ones that fit the bill.

Concerns of Deflation in China

The Producer Price Index has fallen for nine months straight, and the Consumer Price Index slowed to 0% in June. This has led to concerns about deflation in China and broader sluggishness in the world’s second-largest economy. However, experts believe that the worst may soon be over.

Expectations for the Politburo Meeting

A gathering of Chinese leaders, called the Politburo, is expected to take place at the end of July. This meeting is highly anticipated as it could result in important decisions and the announcement of policy details that may affect the economy.

Government Signals for Economic Support

The Beijing government has started signaling more economic support in the last two weeks. A government document and subsequent press briefing highlighted the importance of helping the private, non-state-owned sector. However, markets are still waiting for concrete action.

Implications for Investors

For investors, it is important to keep an eye on whether internet platform companies can list their subsidiaries in public markets. This could have significant implications for the sector. Additionally, UBS Securities China Equity Strategist Lei Meng recommends considering sectors such as appliances, food and beverage, computer software, and insurance for potential investment opportunities.

Stocks to Watch

HSBC has identified several stocks with earnings estimates that stand out. Top performers include software company 360 Security, Baosight, and home appliance company Sanhua. However, not all software stocks made the cut, with iFlytek falling short of expectations.

Conclusion

While uncertainties remain about China’s macro policy, the shift in profits towards industrials and consumer sectors presents opportunities for investors. By staying updated on policy decisions and focusing on sectors that show strong fundamentals, investors can navigate the evolving market landscape in China.