22 October 2016
China South Locomotive & Rolling Stock Co. recently completed a consolidation. Photo:
China South Locomotive & Rolling Stock Co. recently completed a consolidation. Photo:

What to do as fund managers engage in window dressing in June

Mid-year results are far more significant for fund managers and brokerages than for individual investors.

The Hong Kong market has posted modest gains in the first half of the year, and most active funds, in particular hedge funds focusing on small-cap stocks, have had a return on investment of more than 30 percent on average.

So, the market is set to face downward pressure, as funds are likely to take profit in light of increasing market uncertainty.

They will wait for a clearer market direction and stay on the sidelines for now.

The Hang Seng Index traded in a range between 22,500 and 25,200 points for some time, then hovered between 27,000 and 28,500 points for nearly a month and a half.

Investors should accumulate stock or take profit at relative support and resistance levels.

Also, I’ve suggested that investors reduce their investment in the equity market by half in May and take profit in some sectors and stocks that have already generated good returns.

They should be half in cash, waiting for the right opportunity.

While investors might suffer some losses in their portfolio because of the recent market correction, they have more buying power now and should take advantage of any potential market sell-off.

A conservative approach is to accumulate A-share ETFs like iShares FTSE A50 China Index ETF (02823.HK), CSOP FTSE China A50 ETF (02822.HK) and ChinaAMC CSI 300 Index ETF (03188.HK).

Another approach is to accumulate mainland banking stocks during a correction.

Market rumors say the government has approved the mixed-ownership reform plan submitted by mainland banks like Bank of Communications (03328.HK), which has become sought after by fund managers.

Also, the sector has an average P/E ratio of only 6 to 7 times, lagging behind other sectors of the market.

In addition, A shares of banking plays are much cheaper than the H shares.

China’s central bank is poised to pump more money into the system, and further monetary easing will benefit the banking sector.

Also, the debt swap program has reduced the systemic risk of bad loans for Chinese banks.

And the “one belt, one road” strategy will bring new business for Chinese banks in infrastructure loans.

Another key market theme is consolidation of state-owned enterprises, and the most attractive ones are those struggling with the worst financial situations.

China South Locomotive & Rolling Stock Co. (01766.HK) has started trading after completing a consolidation.

The SOE reform is likely to accelerate.

Investors should watch closely the developments in the power sector, as the merger between China Power Investment Corp. and State Nuclear Power Technology Corp. will create a giant group worth about 700 billion yuan (US$113 billion).

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

Translation by Julie Zhu

[Chinese version]

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columnist at the Hong Kong Economic Journal

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