I wrote last week that investors should shed their inhibitions and make some short-term speculative bets in the Hong Kong market this month. The rally of the past few days has validated my view.
As mainland and foreign funds flow rapidly into the market, investors should elevate their allocation from 50 percent to all-in, and bet on heavyweights like mainland banks, insurers and other state-owned enterprises, in particular the bluechips that have lagged behind so far.
The Hong Kong market usually sees two to three rounds of big rallies in a year, and investors should take advantage of that. Else, you could end up with regret for missing out.
April is a safe period and investors could bet on the market with confidence. There could be some short-term volatility, which will also create opportunities for buying. The Hang Seng Index is likely to come close to the 2007 peak of 32,000 points.
Financial Secretary John Tsang said last week that the Hong Kong market has not followed a pattern similar to the mainland’s A-shares, and warned investors to be wary of market fluctuations. But his comments may not be on the mark, judging by his predictions in the past.
One should bear in mind that Tsang’s forecasts on the government budget surplus had also varied widely with the actual figure. Given his wrong projections, one can only conclude that he may be not that competent in investment analysis.
Tsang’s recent comments came in response to the rampant irrational sentiment in A-shares. Some foreign investors have noted that mainland retail investors have an average education background of middle school. That explains why Tsang is keen to separate Hong Kong market away from A-shares.
However, we shouldn’t forget the fact that the central government is sparing no effort to lift up A-shares as it tries to counter the negative impact from the economic slowdown and sluggish export demand. The wealth creation impact from the stock market rally will help smooth the path for economic reforms.
And optimizing the Shanghai-Hong Kong Stock Connect will help channel some hot money into less risky H-shares. That would also help internationalize the renminbi.
Massive fund flow should boost underperforming stocks and help investors take some profits. And the wealth creation impact will be much greater than the sweeteners granted by Tsang’s budget. Overall, the rally in both mainland and Hong Kong markets is exactly what Beijing hopes to see at the moment.
Different big investors will adopt different strategies in the market. Mainland institutional investors usually prefer bidding up/down one stock in one direction, while local investors would take a break after a period of rally or decline. And the latter will then get rid of short-term trend followers and bid up/down the stock.
By contrast, mainland institutional investors prefer to bid up the stock to a target price and take profit quickly. But it remains unclear if they would switch to different stocks and move the money back to the mainland. However, these investors are very active and sensitive to certain policy or market news, which makes it very difficult to follow the trend.
Investors should be more careful when the market turnover drops and share placement and fund-raising activities continue to gather momentum. Share placement is definitely good news under the current bullish market sentiment. Investors can look for second- and-third-tier stocks.
This article appeared in the Hong Kong Economic Journal on April 14.
Translation by Julie Zhu
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