Investment Rating - The report does not explicitly state an investment rating for the industry Core Insights - The report highlights flow-driven factor rotations due to rising volatility from external shocks and policy changes, leading to frequent shifts in investor positions and flows [5][8] - Retail Trading Proportion (RTP) is used as a proxy to gauge investor sentiment, indicating that capturing alpha from flow-based signals is easier during flow-driven markets, especially with high retail participation [8] - The best investment ideas identified are Offshore Ownership and High-Dividend stocks, which serve as informative indicators for stock picking [122] Market Overview - China's domestic equity market offers diverse investable universes with approximately 2,700 eligible names as of April 2025, facilitated by the Stock Connect program [13] - The market capitalization distribution across various indices shows significant liquidity and varying P/E ratios, with the CSI300 index having a P/E ratio of 28.7 and a dividend yield of 2.3% [14] Performance Comparison - The annualized return for the CSI300 index is 7.5%, while the CSI500 and CSI1000 indices show returns of 10.2% and 10.6% respectively, indicating a performance trend favoring smaller-cap indices [17] - The maximum drawdown for the CSI300 index is -71%, highlighting the volatility in the market [17] Policy Highlights - Key policy events have influenced market volatility, including liquidity improvements from policy easing in February 2019 and the impact of COVID-19 in February 2020, which led to significant market recovery [24][25] - Recent policies in November 2023 focused on regulating algo-trading, indicating a shift towards more structured trading environments [25] Investor Landscape - Retail investors account for approximately 40% of market capitalization and contribute around half of the total market turnover, indicating their significant role in market dynamics [31] - Northbound investors hold over RMB 2 trillion in market capitalization, contributing about 7% of total market turnover, while Southbound investors have seen substantial inflows since 2017 [48][56] Factor Rotation - The report discusses three phases of factor rotation in the market, with the current phase characterized by increased volatility and frequent shifts in investor sentiment between fear and greed [90][93] - A factor timing strategy based on retail investor sentiment has generated an annualized return of 9.6% since 2018, outperforming an equal-weight factor model [118] Smart Money Analysis - The report identifies smart money trends amid volatility, emphasizing the importance of onshore margin financing and short selling as indicators of market sentiment [120] - Offshore ownership and high-dividend stocks are highlighted as key areas for capturing alpha in the current market environment [122]

Investment Rating - The report maintains an "Overweight" rating for Capital Goods and Software sectors, indicating a favorable outlook for these industries [57]. Core Insights - Leading indicators suggest a stronger earnings backdrop than anticipated, with high-single-digit EPS growth projected over the next year [4][9]. - Earnings revisions breadth has improved significantly, moving from -25% in mid-April to -9%, indicating a positive shift in earnings expectations [4][9]. - The Non-PMI Leading Earnings Indicator points to mid-teens EPS growth by the first half of 2026, driven by stable demand and reduced material costs [4][9]. - A weaker US dollar, down 11% from January highs, is expected to provide additional support for US earnings trends, with further downside anticipated [4][9]. Summary by Sections Earnings Outlook - The main earnings model forecasts high-single-digit EPS growth for the next year, supported by improving earnings revisions breadth [4][9]. - The Non-PMI Leading Earnings Indicator suggests mid-teens EPS growth by 1H26, driven by demand stability and lower material costs [4][9]. Sector Preferences - Capital Goods and Software sectors are highlighted as key beneficiaries of a weaker dollar, with significant inverse correlations between earnings revisions breadth and the dollar [16][21]. - Capital Goods are expected to benefit from infrastructure build-out, while Software is positioned to leverage GenAI for cost efficiency and revenue growth [13][15]. Market Dynamics - The report emphasizes the importance of earnings revisions breadth as a driver for industry group outperformance, particularly for Capital Goods and Software [12][22]. - The US equity market is preferred over international equities due to stronger earnings revisions in the US compared to Europe and Japan [22]. Financial Sector Insights - The Financials sector is viewed positively, with expectations of a stabilizing M&A environment and resilient consumer conditions [31][33]. - Companies are leveraging AI to enhance operational efficiency, which is expected to contribute positively to earnings growth [37][39].

Summary of Key Points from the Conference Call Industry Overview - **U.S. Autos & Mobility**: The industry view has been downgraded to Negative due to multiple near-term pressures including earnings challenges, consumer health risks, and uncertainties surrounding auto tech investments. Auto tariffs are expected to persist, and current valuations do not fully account for these risks [5][13][67]. Core Insights - **Earnings Pressure**: The near-term investment case for the U.S. autos sector is increasingly difficult, with expectations of earnings pressure and potential withdrawal of 2025 guidance due to the uncertain environment. The consensus earnings estimates for Q1 2025 have been revised down to -2% for Europe and 7% for the U.S. [5][19][21]. - **Tariff Impact**: The revised definition of semiconductors under U.S. tariffs could affect an additional $261 billion in imports from major Emerging Asian economies, with Taiwan and Vietnam being the most impacted. This change may reduce the effective tariff rate on China's exports to the U.S. [6][29][27]. - **Sector Preferences**: There is a preference for suppliers over OEMs in the current environment, with favorable traits including low financial leverage, high margins, and strong pricing power. Specific companies like Autoliv (ALV) have been upgraded due to their defensive positioning [5][15][18][67]. Earnings Expectations - **1Q Earnings**: While beats on Q1 EPS are expected due to better-than-anticipated production and pricing, these are likely to be disregarded in the current market context. The overall sentiment suggests that earnings growth is stagnating, with significant downside risks in the event of a recession [5][19][21][22]. - **Valuation Concerns**: European equities are currently pricing in approximately 0% EPS growth, with potential downside if a recession occurs. The market has already reflected a ~10% pullback from February highs, indicating a cautious outlook [20][22]. Additional Insights - **Market Volatility**: The upcoming earnings season is expected to be scrutinized more than usual due to heightened volatility and tariff-related concerns. Investors are advised to focus on companies with relatively cheap or expensive earnings volatility [25][24]. - **Sector Dynamics**: Cyclical sectors are anticipated to drive EPS growth in Europe, but earnings momentum is weakening. Defensive sectors are catching up as revisions for cyclicals remain negative [23][22]. Rating Changes - **Downgrades**: General Motors (GM) has been downgraded to Equal Weight, with a significant reduction in EBIT estimates from $14.4 billion to $8.6 billion for 2025. Other companies like Aptiv (APTV), Mobileye (MBLY), and Visteon (VC) have also been downgraded due to risks associated with auto tech uptake [14][16][67]. Conclusion - The U.S. autos sector faces significant challenges from tariffs, earnings pressures, and macroeconomic uncertainties. The focus on suppliers and defensive positions may provide some resilience, but overall market conditions remain precarious with potential for further downgrades in earnings expectations.

Investment Rating - The report maintains an Equal-weight (EW) stance on MSCI China within the global EM/APXJ framework [9]. Core Insights - The report anticipates higher near-term market volatility due to the US imposing additional tariffs on China, raising the total tariff rate to up to 65% [2][4]. - The A-share market is viewed as better positioned for hedging and diversification compared to the offshore market, as A-share investors are less sensitive to tariff changes [3]. - The direct impact on earnings from the tariffs is expected to be smaller than the overall drag on macroeconomic growth, with the MSCI China universe generating only 13% of its total revenue from markets outside China, and less than 3% from the US [7]. Summary by Sections Market Volatility - The report highlights that the recent tariff hikes could lead to elevated market volatility as the market adjusts to the potential economic impacts [2][4]. A-Share Market Positioning - The A-share market is recommended for investors seeking stability, as it has shown lower correlation with global markets and less volatility compared to offshore markets [3]. Earnings Impact - The report suggests that the overall drag on equity market earnings will be less severe than the impact on macro growth, primarily due to the limited revenue exposure of listed Chinese companies to the US market [7]. Companies with High US Revenue Exposure - A list of 30 companies with the highest revenue exposure to the US market is provided, indicating potential negative impacts on these companies in the near term [8]. Key Indicators to Monitor - The report advises monitoring the USDCNY exchange rate, signs of US-China negotiations, and any significant policy easing measures to stabilize domestic growth [9].

Summary of Key Points from the Conference Call Industry Overview - The discussion primarily revolves around the impact of tariff escalation and de-globalization on global economic growth and inflation, particularly focusing on the US and European markets [1][2][8]. Core Insights and Arguments 1. **Tariff Impact on Global Growth**: - The implementation of 60% tariffs on 75% of Chinese imports to the US and 10% tariffs on the rest of the world (RoW) could lead to a global GDP decline of approximately -0.5% [1][10]. - Inflationary pressures are expected to vary, predominantly affecting the US [1][10]. 2. **Market Pricing of Tariffs**: - Bond and equity markets have begun to price in the likelihood of tariff escalation since January, with US 10-year real yields decreasing by 30-50 basis points and 2-year inflation expectations increasing by 70 basis points [2][14]. - Tariff-sensitive stocks in the US have underperformed the broader market by 17%, while in Europe, the underperformance is 9% [2][15]. 3. **Sector-Specific Impacts**: - In the US, analysts have downgraded sales and earnings growth expectations, particularly in sectors sensitive to tariffs such as Consumer Durables, Autos, and Retail [2][20]. - In contrast, European analysts have shown resilience, with no significant downgrades in tariff-sensitive sectors like Autos, Luxury, or Pharma [2][20]. 4. **Expectations for US and EU Markets**: - The US equity market is expected to decline slightly (around -3%), with hard assets like Gold Miners and Energy expected to outperform [3][40]. - In Europe, while the market appears resilient, tariff-sensitive stocks may still face a further decline of about -10% as earnings expectations are revised lower [4][46]. 5. **Investment Strategies**: - Suggested strategies include selling puts on Gold Miners while buying puts on Financials to manage risk exposure [3][41]. - For Europe, a hedging strategy involving SXEP/SX6P puts is recommended to protect against cyclical underperformance [7][46]. Additional Important Insights - **Price Elasticity of Demand**: The price elasticity of demand in sectors like Pharma and Luxury is considered low, which may mitigate the impact of tariffs on these industries [2][20]. - **Future Growth Projections**: There is an expectation of growth acceleration in Europe due to fiscal stimulus, which could support valuations despite the current tariff-related uncertainties [4][46]. - **Analyst Forecast Adjustments**: In the US, there is a notable trend of declining sales and earnings growth estimates, while in Europe, estimates remain stable or are increasing, indicating a divergence in market sentiment [20][25]. This summary encapsulates the critical points discussed in the conference call, highlighting the implications of tariff escalations on various sectors and the overall market outlook in both the US and Europe.

Summary of Earnings Call for Asia EM Equity Strategy Industry Overview - The earnings results for Emerging Markets (EM) and Asia Pacific excluding Japan (APxJ) in 4Q CY24 were generally in line with expectations, with EM showing a slight increase of +0.8% and APxJ at +1.5% [2][10] - Japan reported a strong earnings season with a notable increase of +13.7%, driven by a high net beat ratio of +23 percentage points [2][6] - China also showed positive momentum with earnings growth of +7.7% [3][6] Sector Performance - The Communication Services sector led the earnings surprises with a +15.2% increase, particularly driven by Telecom Services which saw a remarkable +36.0% [4][31] - Real Estate also performed well with an earnings surprise of +11.9% [31] - Conversely, the Materials sector faced significant challenges, reporting a decline of -15.2%, with Paper & Forest Products showing a major miss at -68.4% [4][31] - Utilities also underperformed with a -6.9% surprise [31] Regional Insights - EEMEA (Eastern Europe, Middle East, and Africa) reported a solid aggregate beat of +6.8%, with notable contributions from the United Arab Emirates (+12.6%), Saudi Arabia (+9.1%), and South Africa (+8.6%) [3][6] - In contrast, Latin America faced major misses, with an overall decline of -16.8%, primarily due to Brazil (-20.7%), Chile (-20.3%), and Mexico (-10.8%) [3][6] Key Stock-Level Surprises - A list of companies expected to see upward revisions in their earnings estimates includes: - Sea Ltd (Communication Services) with a market cap of $76.85 billion and a price target upside of 31% [5] - XPeng Inc. (Consumer Discretionary) with a market cap of $19.21 billion and an expected upside of 18% [5] - Tenaga Nasional (Utilities) showing a significant upside potential of 53% [5] Earnings Surprise Ratios - Japan's earnings surprise ratio was the highest at 13.7%, with 54% of companies reporting above expectations [6][25] - In contrast, Brazil had the lowest surprise ratio at -20.7%, with 28% of companies missing consensus [6][25] Additional Insights - The breadth of earnings surprises was weaker across EM and APxJ, with EM showing a -7 percentage point breadth and APxJ at -4 percentage points [2][6] - The overall revenue performance across the region slightly beat expectations, with EM at +1.8%, APxJ at +1.4%, and Japan at +1.9% [2][6] This summary encapsulates the key findings from the earnings call, highlighting the performance of various sectors and regions, as well as specific stock-level surprises that may present investment opportunities.