Chinese officials have openly supported the stock market with various measures over the past year.
It’s quite clear Beijing wants to make the most of its fundraising potential to benefit corporates and the economy.
The market rally is set to continue unless the government is happy with current valuations which are in the medium range by historical comparison.
That means H shares keep pace with A shares, even pull away, given Hong Kong is a major capital-raising hub.
Investors should not settle for 20 or 30 percent profit when the market has gained 2,000 or 3,000 points in the past few days alone.
They can expect some individual stocks to surge two or threefold in such a bull market.
Many funds and retail investors have returned to the market as shown by daily turnover above HK$250 billion (US$32.26 billion) for two straight days.
And the Hong Kong market is a long way from a bubble given that the southbound trading quota in the Shanghai-Hong Kong stock link has been used up for the first time.
In addition, P/E ratios are near 13.5 times even if the Hang Seng Index tops 32,000 points.
The market rally is backed by fundamentals, market sentiment and valuation.
Investors can easily reap lucrative profit as long as they are patient enough to hold quality stocks.
Chinese enterprise stocks have outperformed in the recent market run-up, proving that the rally is mainly driven by improved valuations.
Investors should closely watch closely three categories of stocks — railway, infrastructure and industrial — which have long lacked fundamental support and underperformed.
These stocks have spiked recently. The question is how long will valuation recovery last without earnings support?
Also, investors should explore mainland insurance and brokerage stocks which are set to benefit from the market rally and active trading.
Environmental plays and internet technology counters also bear watching.
Beijing is stepping up efforts to tackle pollution and 4G development is accelerating, benefiting smartphone manufacturers, content providers, telecom firms and data centers.
These stocks will post increased earnings in coming years. Those with solid earnings support will perform better in the long run.
The Hong Kong market is already overbought after two days of sharp gains.
Investors should hold back while the majority celebrates. They should expect more given that the Hong Kong market has gathered momentum in the past eight years.
It’s quite possible the benchmark will hit 32,000.
This article appeared in the Hong Kong Economic Journal on April 10.
Translation by Julie Zhu
[Chinese version 中文版]
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