JP MORGAN CHASE(US:JPM)2025-04-01 01:29Investment Rating - The report maintains a positive outlook for the China equity market, with raised index targets for MXCN and MXHK, indicating a bullish sentiment for the upcoming quarters [5][6]. Core Insights - The report anticipates a mixed environment for 2Q25, with intertwined upside and downside risks, driven by factors such as better-than-expected EPS growth and potential macroeconomic challenges [5][6]. - The adoption of AI technologies, particularly DeepSeek, is expected to enhance corporate margins by identifying cost-saving opportunities [15][21]. - The report highlights a significant shift in fund flows, with US/HK listed China equity ETFs experiencing substantial net inflows, reversing previous outflows [23][26]. Summary by Sections 2Q25: Margins May Surprise Positively - The report identifies four key positives for 2Q25, including relative EPS growth upcycle within Asia and the positive impact of DeepSeek on corporate margins [7][15]. - The MSCI-China index has shown resilience, benefiting from improved policy visibility and earnings upcycle [7][8]. Index Targets, Sector Allocation, and Top Picks - The report raises all three targets for MXCN from HK$58/67/76 to HK$70/80/89 and for MXHK from HK$9,500/10,700/11,800 to HK$10,300/11,600/12,400 [5][6]. - Sector recommendations include upgrading Discretionary and Healthcare to Overweight (OW) while downgrading Industrials to Neutral [5][6]. Consumption and Retail Trends - Retail sales in China showed a year-on-year increase of 4.0% in January-February 2025, indicating a recovery in consumer sentiment [61][64]. - The report notes that the average home price to household income ratio has reached historically low levels, suggesting improved affordability in the housing market [45][70]. Fund Flows and Market Dynamics - Offshore passive fund flows have driven net inflows into China equities, accounting for 119% of total net inflows year-to-date [26][34]. - The report estimates that a 50 basis point increase in allocation to China could result in US$82 billion (Rmb592 billion) of net inflows [34].