Date
20 September 2017
Quantitative easing by the European Central Bank is expected to see global funds exit Europe for better returns (left photo). In China, a corruption crackdown is expected to dominate market sentiment. Photos: Bloomberg, CNSA
Quantitative easing by the European Central Bank is expected to see global funds exit Europe for better returns (left photo). In China, a corruption crackdown is expected to dominate market sentiment. Photos: Bloomberg, CNSA

Global funds, mainland investors in tug-of-war

With the European Central Bank printing more money from mid-March, global funds are poised to exit Europe amid bearish sentiment on the euro.

At the same time, the Chinese government faces a challenge to stabilize economic growth and internationalize the nation’s currency by fiscal and monetary adjustments.

These factors will lead to increased market volatility in Hong Kong and China.

In fact, “smart money” is outperforming various state-owned plays as China’s political and economic space becomes even more complex.

H shares have become a battlefield for mainland “smart money” and foreign funds.

That has not only reversed the trend line in H shares but also boosted market volatility.

In this case, balanced global funds would buy into mainland insurance, banks and infrastructure plays in anticipation of a market correction but they have scaled back the bet.

A similar investment strategy has emerged in American depositary receipts (ADRs) of US-listed Chinese internet technology firms, H shares, high-yield bonds and defensive stocks.

Meanwhile, the anti-corruption campaign will be a long-running task for the government.

Beijing is determined to crack down on serious violations, big business-official collusions and those who pose a threat to the party or refuse to confess their sins.

Investors should be wary of risk in private-owned property stocks.

Kaisa Group (1638.HK) has been suspended from trading for a while and the market is speculating that Shenzhen Overseas Chinese Town (000069.CN) and Sunac China Holdings (01918.HK) might take over.

Mainland property stocks may shine again after the government wraps up the corruption crackdown.

Macau gaming is another sector that has been battered by the anti-graft drive.

Beijing might ease the tight grip after establishing a system to prevent money laundering.

The rally in Macau gaming stocks is a technical rebound and would be short-lived.

Some reports say Galaxy Entertainment Group (00027.HK) will open a new casino soon, but VIP gaming revenue may struggle to pick up while the mass gaming market offers low returns.

Also, Beijing has repeatedly urged Macau to diversify its economy, which indicates that it would continue its corruption crackdown.

By contrast, mainland insurance stocks will benefit from gains in the A share market this year.

The State Council has said that commercial insurance will become a pillar of social welfare. And Shanghai is also transforming itself into a global insurance hub.

The China Insurance Regulatory Commission has decided to allow investment funds of domestic insurers to set up private equity (PE) funds.

The market potential will be enormous after insurance products are offered on the internet and the government unveils a unified pension system.

As a result, China Life Insurance (02628.HK) and China Pacific Insurance Group (02601.HK) have seen their stocks hit new highs recently. The narrow gap between dual-listed insurance plays has also shown bullish sentiment among foreign funds.

China Pacific Insurance Group has an A-H price gap of 11 percent while Ping An Insurance Group (02318.HK) has an 8.3 percent gap.

Big Chinese insurers posted more than 40 percent growth in EPS last year. China Pacific Insurance Group is expected to maintain 22 percent growth this year.

The projection has not priced in recent policy support.

These insurance plays should be the main target for bets during a market correction.

They enjoy competitive advantage in terms of investment return due to the nation’s semi-closed capital market.

This article appeared in the Hong Kong Economic Journal on Jan. 27.

Translation by Julie Zhu

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JZ/JP/RA

columnist at the Hong Kong Economic Journal

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