24 October 2016
Investors should be more patient and continue to hold on to good stocks until they reach the peak. Photo: AFP
Investors should be more patient and continue to hold on to good stocks until they reach the peak. Photo: AFP

Don’t take profit: the peak is yet to come

Many foreign investors have been offloading shares for fear of a hard landing in China’s economy. Believing that the H-share rally was about to lose steam, they opted to take profit before the Easter holiday break.

However, Chinese authorities made an announcement before the holiday that mainland mutual funds would be allowed to buy H shares. The move triggered a sharp rally in A shares while the Hong Kong market was closed for the holiday.

The Hong Kong market staged a quick catch-up after the holiday. Some thought H shares wouldn’t rally too much as foreign investors continued to take profit amid the gloomy economic outlook for China. But the market rally has continued to gather momentum even while foreign investors are dumping shares.

Chinese mutual fund managers have been buying H shares and selling A shares to lock in profit, and this has triggered a consolidation of A shares.

A famous hedge fund manager said there is confirmation for a mainland market bull, which would boost fund performance and management fee income. However, his fund has underperformed because of hedging.

Therefore, investors should not blindly hedge their investment amid a bull market, and they should follow the market trend and not short sell.

Instead, they should increase their investment, taking advantage of market corrections. Then they will accumulate considerable assets at the end of the bull cycle. By then they can sell half or even all of their holdings to realize financial freedom.

H shares are becoming more attractive as A shares are far more expensive, driven by the Shanghai-Hong Kong Stock Connect. However, some local fund managers have switched their focus to European and US markets and ditched Hong Kong and mainland markets.

In terms of investment return, certain European stocks have performed very well despite a 10 percent drop in the euro exchange rate against the US dollar. Porsche, BMW and Benz have surged by 26.02 percent, 17.99 percent and 16.27 percent respectively after deducting the currency factor.

By contrast, HK-listed mainland blue chips have performed even better. Plays associated with the One Belt, One Road strategy include China Communications Construction (01800.HK), China Railway Construction (01186.HK), CSR Corp. (01766.HK), China CNR Corp. (06199.HK), Kingsoft Corp. (03888.HK), and Kingdee International Software Group (00268.HK).

Brokerages, money management stocks, airline plays, GOME Electrical Appliances Holding (00493.HK), and China Oilfield Services (02883.HK) all have posted sharp price gains and rising trading volume, which could soar double-digit within a single day.

A retail investor bought China Life Insurance (02628.HK) at a high level of about HK$35, and I suggested that she hold the stock after it closed at HK$37.35 on Wednesday. Those who buy stocks at peak level usually would rush to sell at no loss or small profit.

But investors should be more patient and continue to hold good stocks until they reach the peak — unless they are holding stocks like HSBC (00005.HK). 

We’re in the middle of a big bull run after six and a half years, which should last longer and go up higher.

This article first appeared in the Hong Kong Economic Journal on April 9.

Translation by Julie Zhu

[Chinese version 中文版]

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Founder and Managing Director of Pegasus Fund Managers Ltd.

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