28 October 2016
Ping An Insurance is among the attractive plays for investors. Photo: Bloomberg
Ping An Insurance is among the attractive plays for investors. Photo: Bloomberg

It’s still a bull market but watch out for the bumps!

Technical analysis could offer some insight into the prospects of the Hong Kong market, given the expectations that there could be greater volatility in the months ahead.

The Hang Seng Index passed the 25,000-points mark early this month, supported by active trading, and continued to climb until it reached 28,031 on April 13. 

The market has run up after hitting a bottom at 23,677 points in mid-March, and hit the peak of 28,031 points one month later. Therefore, it could fall back to the range of 25,854 and 26,368 points, an ideal band for investors to re-enter the market.

The benchmark has tested a resistance level for first time on Monday.

Looking at the positive factors, the Chinese central bank is likely to eventually reduce the reserve requirement ratio (RRR) for commercial lenders to 16.0-16.5 percent. Authorities have room to lower the ratio by 2.0 to 2.5 percentage points after the 100-basis-points reduction that was announced on Sunday.

Such move could inject another 3 trillion yuan into the financial system, and also mitigate the bad loans pressure for mainland banks. These plays should benefit the most from continued monetary easing and stabilizing economic growth.

We’ve already seen some price premium for mainland banks in the Hong Kong market compared with A-shares, a sign that foreign investors are replenishing the stocks due to improved confidence. Given this situation, investors should take advantage of any corrections to buy into these stocks.

The central bank has stepped up efforts in policy loosening in a bid to ensure 7 percent growth rate for the economy in the second quarter.

Against this backdrop, investors should watch closely infrastructure and high-speed railway plays, and could also bet on some free-trade-zone and new-energy sectors.

Other attractive plays include Ping An Insurance Group Co. of China (02318.HK) and a number of A/H ETFs, like Hang Seng Investment Index Funds Series – H-Share Index ETF (02828.HK) and CSOP FTSE China A50 ETF (02822.HK).

Investors should switch bets in different sectors from time to time amid the liquidity-driven market. They have to adjust their strategy in line with the active players in the market. For example, funds are mainly betting on blue-chip state-owned enterprises, while retail investors are focusing on theme-driven and third- or fourth-tier stocks.

Beijing has rolled out various measures to guide money flow in mainland and Hong Kong. The latest one-percentage-point RRR cut will release up to 1.5 trillion yuan to the market, part of which would flow into A-shares.

Meanwhile, authorities have tightened margin-trading rules, a move which has curbed brokerages’ capability to offer financing for their clients. 

The development has led to the A share ETF posting sharp corrections and the Hang Seng China Enterprise Index falling more deeply than the Hang Seng Index. Overall, the measures will help Beijing cool the red-hot A-share market in the short term.

Also, the central government has blocked the underground money flow into Hong Kong. The “hot money”, mainly from nearby Guangdong province, usually targets dual-listed and growth enterprise stocks.

Now, these plays may face considerable headwind if the money flow link remains cut off. Investors should take profit and eliminate positions in related stocks.

This article appeared in the Hong Kong Economic Journal on April 21.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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