Date
26 July 2017
San Francisco Federal Reserve president John Williams believes the US central bank should raise rates twice this year. Photo: Bloomberg
San Francisco Federal Reserve president John Williams believes the US central bank should raise rates twice this year. Photo: Bloomberg

How to benefit from coming US rate hike

The US dollar has gained strength after US housing sales increased 2.2 percent in May from April, although durable goods orders dipped for the second straight month.

The majority of Federal Reserve officials are suggesting a rate hike this year. In fact, San Francisco Federal Reserve president John Williams believes the US central bank should raise rates twice this year.

Financial stocks are set to benefit from any rate hike whether it be in September or in December. The financials index has lagged behind the market for many years in the United States, and the benchmark is only two-thirds of the 2007 peak level.

However, the upside might be limited because regulation, business environment and profitability was different in 2007.

The allocation of your investment portfolio determines 90 percent of your investment return. Different stocks in the same industry could perform with great divergence.

Therefore, some long-short funds could find the best and worst stocks in a certain industry and apply long/short strategies. If they manage to make the right bets, these funds could make easy profit. However, wrong bets would have the opposite result.

A shares

The Shanghai Composite Index has rebounded swiftly after tumbling around 20 percent to 4,300 points on Tuesday, June 23.

If the benchmark breaks through 4,800 points, a key resistance level, the market may continue to shoot up. If not, the market would hover around 4,000 to 4,800 points in the near term.

Investors should take the opportunity for bottom-hunting if the index stays above 4,300 points.

They should consider increasing their holdings if the index slumps below 4,300 points.

Mainland banks, insurance, property, brokerage and financial plays are very attractive.

The HSBC/Markit Flash China Manufacturing Purchasing Managers’ Index (PMI) edged up to 49.6 in June, hitting a three-month high. New orders returned to positive territory at 50.3 for the first time in four months.

However, Beijing has launched 11 projects in a bid to maintain its GDP growth rate at 7 percent.

Meanwhile, the nation’s net interest spread has reached a record high of 3.9 percent. Therefore, the central bank may further reduce the interest rate and reserve requirement ratio.

Massive foreign capital has flowed into the Shanghai market through the northbound trading of the Stock Connect.

As much as 13.1 billion yuan (US$2.1 billion) flowed into the mainland on Tuesday after the market tumbled to 4,300 points.

More foreign investors may jump aboard if A shares continue to hover around 4,000 points in the near future.

This article appeared in the Hong Kong Economic Journal on June 25.

Translation by Julie Zhu

[Chinese version中文版]

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JZ/JP/CG

Founder and Managing Director of Pegasus Fund Managers Ltd.

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