The tighter China's financial conditions, the higher the real estate stocks? Yes, this is a seemingly strange phenomenon since 2022 (Figure 1). Since the beginning of the year, due to the sharp increase of economic downward pressure and the lack of effective hedging on the policy side, China's financial conditions have continued to tighten, which also reflects the increase of policy uncertainty, especially the radical shift of the Federal Reserve's monetary policy. However, real estate stocks continued to outperform the market during this period, although the data of land acquisition and sales of real estate developers did not improve in the same period.
It is not uncommon for real estate stocks to outperform the market when financial conditions tighten. As shown in Figure 2, historically, real estate stocks have achieved significant excess returns relative to the market in the three periods from August 2008 to June 2009, may 2015 to January 2016 and December 2011 to October 2012. At that time, the economy was also in the process of constantly seeking the bottom in the later stage of the downturn, but the continuous tightening of financial conditions showed that the market still questioned the effect of the early policy until the signal of economic stabilization appeared, and the excess market of real estate stocks ended.
It can be seen that the lower the economy and the greater the uncertainty of steady growth, the better the relative performance of real estate stocks. The logic behind it is also very simple: the tightening of financial conditions will be transmitted to the real economy twice. Therefore, the greater the policy uncertainty - the tighter the financial conditions - the greater the downward pressure on the economy. The more this scenario is interpreted, the more the market will expect to force greater steady growth, and the importance of stimulating real estate will bear the brunt. From the above three periods of history, it is true that the fermentation expected for steady growth has been fulfilled by stimulation.
So how should we view the interpretation of this round of real estate stock market? We think it depends on the goal of this round of steady growth. As we all know, the government work report of the two sessions this year set a growth target of 5.5% of the annual GDP, but when setting this target, we did not expect the outbreak of a new round of Omikron epidemic. Since the impact of this round of epidemic on the economy may be no less than that of Wuhan epidemic in early 2020, we believe that there are two scenarios for the steady growth of policies after this round of epidemic.
First, we will no longer pursue the growth target of 5.5% in the future, but turn to the bottom line thinking. This bottom line will not be determined soon, but depends on when Shanghai will resume production and work. Given that the impact of the epidemic on the economy in the second quarter of 2022 has been irreparable, if we refer to the experience of the epidemic in Wuhan in 2020, the government may release the signal of reducing the annual GDP growth target after the epidemic is controlled, so as to ensure that the economic growth in the second half of the year returns to the potential level.
Second, continue to set the growth target of 5.5%, and continue to strengthen the expected guidance after the release of economic data in the first quarter of 2022. This means that whether the epidemic is under control or not, greater stimulus policies are urgently needed. Then, as mentioned in our previous report, since the second quarter also faces the local change of 17 provincial administrative regions in addition to the epidemic, the coordinated development of steady growth from the central to the local is likely to wait until the third quarter.
We believe that the first scenario above is more likely to happen, which means that once there is a signal to reduce the annual growth target, the excess market of steady growth sectors, including real estate stocks, will end. As shown in Figure 3, referring to the experience in 2020, the steady growth sector outperformed the market only before the outbreak of the epidemic and the release of the data in the first quarter, because the announcement of GDP growth of - 6.8% in the first quarter is tantamount to announcing that the government will no longer pursue specific growth goals.
As for the second scenario, although we think the probability is small, if it occurs, given that the economy is likely to bottom again in the second quarter of 2022, the excess market of the steady growth sector is expected to continue in the second quarter.
Risk tip: the epidemic spread exceeded expectations, and the policy hedging economic downturn was less than expected
