18 July 2018
Chinese equity investors need to think and act swiftly amid a dynamic market environment. Photo: Reuters
Chinese equity investors need to think and act swiftly amid a dynamic market environment. Photo: Reuters

Investors must sprint like antelopes in Year of the Goat

Investors should sprint like antelopes in the new year, thinking fast and acting swiftly, to get the best returns in an environment marked by continued deleveraging and sideways market movements.

If people fail to think independently and make accurate risk-return analysis, they could end up becoming lamb feast for major market players.

The existing Shanghai-Hong Kong Stock Connect and the upcoming Shenzhen-Hong Kong bourse link will lure more global investors into China’s A-share market. Therefore, investors may be easily affected by two dominant market forces, namely mainland retail players and global funds.

These two forces could lead to the effect of “sheep flock” from time to time, as big mainland investors usually flare up various market rumors. For example, the talk last week of consolidation of several big central state-owned enterprise (SOEs), which pushed shares of all the big oil firms — PetroChina Co. Ltd. (000857.HK), Sinopec Corp. (00386.HK) and CNOOC Ltd. (00883.HK) — to their upper limits.

China Mobile (00941.HK) and other telecom plays have also been the subject of merger rumors. And some trend followers have become prey for major market players. That said, some investors have made good gains in the expectation of merger of China’s big train makers CSR Corp. and CNR Corp.

Central SOE consolidation looks set to be a key theme to play out in the years ahead as China seeks to revitalize the companies. But the actual progress and final outcome are difficult to predict. Therefore, investors will need some patience to bet on these plays.

As many as 15 central banks around the world have adjusted their interest rates in recent months. The list includes Indonesia, Norway, Australia, India, Sweden, Canada as well as the eurozone. With combating deflation becoming a major task for countries like China, various nations have introduced rate cuts or weakened their currencies to safeguard their economies.

Major economies like China, Japan and some eurozone nations are forced to pump in more money to stabilize their growth and gain some leeway for reforms. That would make the whole market get enveloped with low rates within this year, a thing that investors need to bear in mind.

There are some interesting insights from the poor results of HSBC Holdings Plc (00005.HK). The London-based bank reported Monday a 17 percent decline in pre-tax profit for 2014 to US$18.68 billion, lagging market expectations, due to higher costs and provisions related to financial misconduct charges.

The chairman’s report has shed some light on the future market outlook. The bank cited various uncertainties including geopolitical risk, eurozone saga, political issues, readjustment of currencies and commodities, interest rate changes and unconventional measures adopted by central banks.

Investors should brace for these uncertainties, which may be partly offset by some positive factors, such as strong US recovery and low oil prices. Meanwhile, China is shifting to a domestic consumption-driven growth model, offering some investment opportunities. The internationalization of the renminbi and global infrastructure investment boom will also help.

But some consumption plays could suffer more pain in the future as a result of Beijing’s deepening anti-graft drive. Many state-owned financial institutions and corporations have reported management reshuffles recently, a sign that China is determined to crack down on corruption. Several SOEs saw celebrations and banquets toned down or cancelled during the Chinese New Year.

The anti-graft and austerity campaign will hit some segments, but the overall trend in China will however be positive as domestic consumption will become the growth engine for the economy.

Investors should therefore adopt the correct strategy and pick the right stocks. Some consumption-related names that were sold off after the recent weak economic data could be ripe for the picking.

This article appeared in the Hong Kong Economic Journal on Feb. 24.

Translation by Julie Zhu

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columnist at the Hong Kong Economic Journal

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