21 July 2018
Stock markets will remain in a state of flux as China prepares to usher in the Year of the Sheep later this month. Photo: HKEJ
Stock markets will remain in a state of flux as China prepares to usher in the Year of the Sheep later this month. Photo: HKEJ

Stock markets to remain volatile in near term

Seasonal factor does impact equity markets, historical data shows. The Hang Seng Index has declined by 0.93 percent on average in January in the last 10 years. In January 2008, the benchmark slid 15.67 percent, while in January last year it gained 4.73 percent.

The index can be very volatile. It has soared 900 points or 3.8 percent this January. And in February, the HSI posted a gain of 0.78 percent on average in the last 10 years, with top gain of 6.32 percent in 2012 and sharpest decline of 3.5 percent in 2009.

The data suggests that volatility is relatively lower in February compared to the first month of the year. Still, the market will be in a state of flux.

In China, the A-share market has returned to the bottom level on January 19, after the index failed to stay over the 3,400-points mark several times. The central government has stepped up efforts in corruption fight, deleveraging and maintaining a prudent monetary policy.

Authorities are determined to promote a well-supported bull market, while also curbing undue speculative activity. Amid these initiatives, the Shanghai A-share index is likely to hover between 3,000 and 3,500 points.

Mainland banks and brokerages have suffered some setbacks recently after posting sharp gains earlier. Ming Sheng Bank (01988.HK) has announced top-management reshuffle, while government crackdown on margin trading has checked the rally in brokerage plays.

Elsewhere, the profit growth of China Life Insurance Co. (02628.HK) has lagged market expectations, which has weighed on the mainland insurance sector. And other popular sectors like infrastructure, high-speed railway have been pressured by negative reports. Greece’s new government has halted a privatization plan at its largest port, which has involved Chinese investment. And Mexican authorities have shelved a high-speed rail line after Chinese companies won the bid.

All these sectors had posted significant gains recently, and some catalysts will trigger technical correction. That said, they will remain attractive in the medium-term.

Meanwhile, some sectors have shown an uptick. Macau gaming plays posted sharp gains despite a 17 percent drop in the city’s gaming revenue last month — the eighth straight monthly decline. Internet and telecom plays have also seen some rebound.

In other sectors, Hong Kong property plays have notably reversed a downtrend. Property prices in the city have hit new highs despite increased new home supply. Home sales remain robust amid hopes that the US Federal Reserve will delay interest rate hikes. Among other factors, the restructuring of Li Ka-shing’s business empire has also sparked a rally in local blue-chips.

In some sectors, it remains unclear whether they will shine further in the Year of Goat, as the market awaits earnings data. Investors should treat a rebound as technical rally and just cash out.

Tencent and Alibaba have been ranked as the top two among BrandZ’s top 100 Most Valuable Chinese Brands. But we should remain vigilant about the prospect of IT and internet plays running out of steam amid increasing government scrutiny.

While Beijing will continue to bolster new-economy sectors, it’s quite clear that authorities will step up scrutiny on the internet and telecom players. Although the authorities have shown considerable tolerance over the issue of counterfeit products on e-commerce platforms, online shopping has caused huge tax revenue loss for government.

China’s new leaders have been tightening their grip over internet security, which could bring great uncertainty for the sector. The internet has penetrated the real economy, but there are many loopholes. Therefore, the government might levy tax to boost revenue and warn others for violating laws and regulations.

Therefore, the sector could consolidate after going through a period of rapid growth. Investors should be wary of potential policy risks in placing bets on these plays.

This article appeared in the Hong Kong Economic Journal on Feb. 3.

Translation by Julie Zhu

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columnist at the Hong Kong Economic Journal

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