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Capital is flowing to China as Europe is tense and the US raises interest rates - which sectors and themes benefit?

The situation in Europe is tense and the financial markets are in turmoil. Last Thursday, the European stock market fell sharply, and although the stock market rose on Friday, it is estimated that a large amount of money will still flee Europe next week when the situation is not stabilized.

Will these funds go to the U.S. or China?

In addition, the Federal Reserve is expected to enter the interest rate hike cycle, the dollar index is rising, there will certainly be capital outflows from emerging markets, will these funds flow back to the United States or to China?

Now it seems that at least some of these funds will flow into China, and the instability of the situation in Europe, on the contrary, brings opportunities for China's capital markets.

In this case, which sectors of A-shares as well as funds will have more opportunities?

Capital is flowing to China as Europe is tense and the US raises interest rates - which sectors and themes benefit?

01

The situation in Russia and Ukraine is serious, and the EU countries have no good results to eat, at this time the capital market is very fragile, the European capital in order to hedge the risk, and constantly outflow.

On Feb. 18, the offshore offshore yuan suddenly rose sharply against the U.S. dollar once hitting its highest value since May 2018. And the domestic yuan followed the rise against the dollar, constantly refreshing the highest value.

The rise and fall of exchange rates can be understood simply as the global market demand for a particular currency. In this case, a significant rise in the RMB indicates that global capital is scrambling to buy the RMB.

As the situation worsened, European custodians and family offices urgently increased their positions in safe-haven assets to reduce losses, and European capital bought Chinese government bonds to hedge against risk, which also increased the demand for offshore yuan.

Here, Cai said to understand briefly the need to pay attention to the offshore exchange rate.

The exchange rate of the RMB is quoted both onshore and offshore. The former refers to the RMB issued and circulated in the Chinese market, which is strongly regulated by the state policy, while the latter mainly refers to the price change of the RMB in the overseas trading market, which is mainly influenced by the demand and supply and is not directly controlled by the state.

In general, paying attention to exchange rate changes offshore is a better way to see the changing attitudes of global financial markets.

Capital is flowing to China as Europe is tense and the US raises interest rates - which sectors and themes benefit?

02

Where there is a strong go where is the way of capital.

Because the capital is optimistic about the investment environment in China, all for the sake of profit. The situation in Europe is also not optimistic, after several rounds of epidemic ordeal, Spain's GDP per capita has fallen to $27,000, France's GDP per capita fell below $40,000, Italy's GDP per capita fell below $30,000, the economic depression also accompanied by debt problems.

In this case, also superimposed on the unexpected geopolitical events, European financial markets are even more on thin ice, in this case, capital outflow from Europe is predictable.

At the end of the last century, following the deterioration of the situation in Kosovo, the U.S. and NATO bombed the FRY, when the exchange rate of the euro also depreciated significantly, and it was estimated afterwards that about $1,000 billion fled Europe.

But on that occasion, most of the capital flowed into the United States, which, after all, has a more viable economy and a higher level of technology.

But this time there is a clear difference from last time. On the one hand, China has caught up and the gap with the US is slowly diminishing; on the other hand, it is clear that China's response is more beneficial to the economy under the impact of the epidemic.

So this time, I believe a lot of capital will flow into China.

Capital is flowing to China as Europe is tense and the US raises interest rates - which sectors and themes benefit?

03

In January this year, foreign institutions once again increased their net holdings of RMB bonds, which has been increasing for 10 consecutive months. At the same time, the cumulative amount of bonds held by foreign institutions in custody at the Central Clearing and Settlement Corporation (CCSC) has also been increasing, and this figure has set a new high in 38 months.

Stock market and fund investors may be more concerned about the northbound inflow figures. If we extend the observation time period to quarterly or yearly, we will see that northbound funds have been consistently flowing in.

At present, the U.S. is expected to raise interest rates, while China will continue its relatively accommodative monetary policy. The interest rate differential between China and the U.S. is already below a comfortable space, which, from a normal perspective, is not sufficient to attract foreign capital to enter on a sustained basis. It is clear that the sustained inflow of foreign capital does not only consider Western food, but also other factors.

The key factors are security and liquidity.

Rather than diminishing, risks overseas are increasing. The risk of epidemics, the upcoming mid-term elections in the US, political geopolitical events from time to time, uncertainty about Fed policy, these are all destabilizing factors for capital. The Chinese market has relatively fewer of these factors.

Liquidity is the 2nd aspect considered by international capital. As early as two years ago, China's bond market has become the second largest market in the world, and recent figures show that the average daily trading volume in the interbank market has reached 5.3 trillion yuan. Together with the increasingly mature derivatives market, the liquidity of RMB assets is getting higher for foreign investors.

Moreover, in recent years, the opening of financial markets has been strengthened and more and more two-way interoperability measures have been landed, which are important reasons to attract international capital.

Capital is flowing to China as Europe is tense and the US raises interest rates - which sectors and themes benefit?

04

Domestically, with two downgrades in the second half of last year and two LPR cuts earlier this year, money supply has increased significantly over 2021; internationally, overseas capital is increasingly keen to enter the Chinese market.

With the superposition of these two factors, the abundance of funds in the market in 2022 is far more than that in 2021. If the stock market in 2021 is a game of stock funds, then 2022 will get a lot of incremental funds.

In this case, A-shares have some room for upside.

Specifically, value style stocks are mainly driven by U.S. stock earnings growth, while growth style stocks are mainly driven by valuations, and abundant capital tends to easily push up valuations in a short period of time, so it is estimated that the market will revert to growth style from the second quarter onwards.

Indices that reflect small and mid-cap stocks, such as the CSI 500 Index and CSI 1000 Index, may have better upside.

Some track-themed funds, after getting a full correction in the early part of the year, also have the opportunity to go back to the upward path this year.