【摘要】We identify defensive HK/China stocks， and stocks to avoid in
a bear market post our HK/China index target price reductions and MS FX team's USD stronger-for-longer view.
We recently cut our HK/China equity index targets and are now forecasting a bear market. Our house FX view is that CNY weakens further near term to Rmb6.65/USD by 3Q18. We believe it is important to identify: 1） stock names that are defensive and likely to outperform the Hang Seng index as the market faces further downside risks （Exhibit 1）； and 2） HK/China stocks that investors should avoid in a USD strengthening and/or US-China trade negotiation uncertainty scenario （Exhibit 2）. We have also surveyed Morgan Stanley's HK/China research team on how individual sectors are likely to perform as bear market plays out.
The Defensive list is concentrated on defensive sectors with HKD revenue such as Telecom and Utilities as well as defensive HK property players （landlords an REITs）.
The To Avoid list is concentrated on stocks with debt and/or other costs denominated in USD， limited revenue exposure in HKD or other currencies that are relatively stable vs. USD， and/or that are susceptible to further US China trade negotiation uncertainty.
We have also screened for stocks that investors should try to avoid in a bear market.
These stocks often meet one or more of the following criteria: 1） higher volatility in terms of beta relative to the market （Hang Seng index）； 2） sizeable revenue exposure to CNY （weakening against USD） or cost exposure to USD； 3） subject to US China trade dispute， which has a lot of near-term uncertainty， etc.
这些股票通常符合以下一个或多个标准：1）更高的波动性； 2）相当可观的收入风险人民币（兑美元走弱）或美元成本风险； 3）受美国中国贸易影响
In recent years， Hang Seng has become far more dependent on RMB earnings streams with around 60% of earnings derived from China currently. However， it is a HKD- and therefore USD-pegged index. Periods of RMB weakness vs. USD （as in 2015 and early 2016） are therefore associated with bear markets in Hang Seng， whilst periods of RMB
strength vs. USD （from mid-2016 until recently） are associated with bull markets （see Exhibit 10）. CNY has begun to move markedly lower against the USD in recent trading， tracking generalised weakness in China's trade partner currencies （EM and Euro in particular）. Potential further downside risks to the CNY include a more hawkish Fed， somewhat more accommodative PBOC （which did not raise rates after the last Fed move） and trade tensions between the US and China.