The Hong Kong market has reached the inflection point of greed and fear.
As I’ve pointed out previously, the Hang Seng Index has rallied in April for seven of past nine years, while the China Enterprises Index has risen in the same month for six years out of the same period. Therefore, H shares are very likely to move up in April.
Investors should take advantage of the market momentum, and increase their capital allocation for stocks from 30 percent to 50 percent. They can easily beat the benchmark if they buy the shares of some state-owned enterprises.
However, investors should take profit by the end of this month as the market is more likely to fall rather than rise further in May.
Foreign investors would only buy H shares unless the A shares are included in the MSCI. Heavyweight mainland stocks will be first beneficiaries of Beijing’s efforts to lure foreign institutional investors into the mainland market.
Whether MSCI will include A shares this June will largely determine the prospect of narrowing the price gap of dual-listed stocks in the second quarter. Some H shares appear to be very attractive for the huge price discount as the Shanghai Composite Index is marching towards 4,000 points.
Meanwhile, the US dollar appears to have lost some of its strength recently amid a set of worse-than-expected economic data. The US dollar index has fallen back below 1,000, and this may push back the timetable for an interest rate hike. The strong greenback has become a drag for most Asia Pacific markets.
In particular, the strong US dollar has weighed on Hong Kong’s economy because of the currency peg. Moreover, the local property market has built up a bubble amid the hot money inflows.
H shares have become less attractive amid the strong greenback, while A shares keep marching higher.
But as US dollar has been weakening recently, some capital will flow back into H shares, especially those with large discounts over A shares.
Last week the Hong Kong market recorded a daily trading volume of over HK$100 million. Will that attract more global funds? Will the A-share market be able to transform itself into a global stock market?
These questions will be answered in June. However, I’m not that optimistic about the inclusion of A shares in the MSCI this year.
China will not allow any hard landing for its economy or deflation to occur. Mainland authorities will adopt “proper” monetary easing and press ahead with reforms, while exporting some overcapacity through the One Belt, One Road strategy.
All these themes will become hot topic in both the mainland and Hong Kong markets in the second quarter.
The Hong Kong market is likely to trade upward to a range of 24,000 to 26,000 points from the previous band of 23,500 to 25,300 points. The approach should remain the same: investors should buy into different sectors in rotation.
In the short term, investors should closely watch closely some free-trade-zone plays. A number of relevant stocks will leap to a new high, in particular those big firms in Qianhai, Shenzhen, Zhuhai, Nansha and Guangzhou.
Nuclear power is another interesting sector, as some nuclear companies are expected to beef up their competitive edge in overseas markets in the future. Shanghai Electric Group (02727.HK), CGN Power (01816.HK), CGN Meiya Power Holdings (01811.HK) and Dongfang Electric (01072.HK) are some of the attractive plays.
This article first appeared in the Hong Kong Economic Journal on April 8.
Translation by Julie Zhu
[Chinese version 中文版]
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