22 January 2019
Hong Kong's stock market has traditionally done well in July in the past decade. Photo: Bloomberg
Hong Kong's stock market has traditionally done well in July in the past decade. Photo: Bloomberg

Buy more stocks before a traditional July rebound

Investors who reduced their bets on the stock market, as I’ve recommended previously, must take advantage of market corrections to collect strong second- and third-tier plays in the coming weeks.

Beijing still has plenty of stimulus measures. Investors should now consider increasing equity allocation to 70 percent of their investment portfolios from 50 percent. One should also bear in mind that the Hong Kong market has usually rebounded in July over the last decade.

I tend to re-adjust the short and medium-term investment strategy every three months, as it is very difficult to predict longer-term market trends. It may be a good time now to review the strategy for the third quarter.

From seasonal perspective, the Hang Seng Index has risen in July for the last 10 years, and the Hang Seng China Enterprises Index also rallied in July for nine years over the last decade.

In 2009, the former gained 11.94 percent in July, and the latter rose 10.59 percent during the month. In July 2007, the China Enterprises Index added 11.36 percent.

Last July, the Hang Seng Index gained 6.75 percent and the China Enterprises Index rose 7.69 percent.

The figures show that July has been the best-performing month for the Hong Kong market in recent times. If you believe the trend will continue, you should begin collecting stocks the rest of this month.

As for China’s A-shares, the rally could see some slowdown in the second half this year. Beijing’s sweeping reforms are the main trigger for the market’s momentum.

In the past, individual investors have stayed away from long-lasting bear markets. That led to the Chinese people’s massive savings to flood into the property market and wealth management products.

Authorities have managed to gradually restore market confidence after rectifying brokerages and other financial firms and cracking down on rampant speculation.

This has helped open up new financing channels for both corporates and local governments. Private sector wealth continues to flow into equity markets, which has prompted a number of companies to seek public listings or undertake share placements and bond issues. 

Increased new supply will drain market liquidity, a phenomenon that could trigger a correction even in developed markets. In China, a large number of stocks have also reached levels far beyond what the company fundamentals would warrant.

New share sales have drained 7 trillion yuan recently, and the trend is set to gather momentum in the second half. 

A number of mainland brokerages have imposed tighter rules on margin trading and short-selling, in a bid to steer the market towards the right track. Beijing, meanwhile, might try to step up monetary easing if market conditions are deemed appropriate.

Against this backdrop, investors could pay attention to some smaller stocks relevant to the forthcoming Shenzhen-Hong Kong Stock Connect, as well as mainland property, banking and insurance plays given that Beijing is poised to further loosen its monetary policy in the third quarter.

Central SOEs in steel, agriculture and power sectors could also be sought as authorities are accelerating industry consolidation and sector reforms.

As much as US$7.1 billion of funds have flowed out of China shares as A-shares failed to make it to the MSCI emerging markets index. However, the inclusion will come sooner or later as MSCI has set up a working group with the Chinese securities regulator to tackle some technical issues.

The negotiation will drive Beijing to speed up its capital account liberation and make its currency fully convertible. Foreign investors will start buying A-shares from the second half of this year as it’s widely expected that MSCI inclusion will take place within one year.

Xiao Gang, chairman of the China Securities Regulatory Commission, said 7 percent GDP growth has laid a strong foundation for a bull market.

As reforms gather pace and the market responds well, more foreign investors will be drawn to the country.

This article appeared in the Hong Kong Economic Journal on June 16.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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