The Hang Seng Index has lost almost all the gains it made in the big rally during the second quarter, and mainland A shares are in the middle of a recovery.
The resolution of the Greek debt crisis has eased market jitters, and some oversold stocks have rebounded in the short term.
The market is likely to trade sideways in the third quarter, and investors should neither be too optimistic nor pessimistic about the mainland and Hong Kong markets.
As I’ve noted, Beijing has a huge capability to stabilize the A shares.
The market is likely to edge up steadily after undergoing the deep correction.
Investors should reduce their holdings during market rises and hunt for bargains during market declines.
They should reduce their exposure to the stock market to 40-50 percent of their portfolio.
The drastic intervention measures adopted by Beijing over the last two weeks may cause some unexpected aftershocks for the country’s economic restructuring.
That could affect capital flows and confidence in A shares in the short and medium term, which could ripple into Hong Kong markets in the future.
How should investors react?
They should accumulate some strong second- and third-tier stocks, in particular those that may benefit from policy support or could introduce some powerful shareholders.
Investors may revamp their portfolio using market corrections, but they should cap their allocation to these stocks to about 25 percent.
Also, they should look for small stocks that have been oversold and are priced at levels similar to those in early April. These stocks have limited value for medium-term investment.
The Greek crisis and the deleveraging effort in China have weighed on the Hong Kong market.
The Hang Seng Index touched a bottom of 22,850 points, which is in line with my earlier suggestion for buying at 24,000-25,000 points, similar to its March level.
The index has strong support in this range.
However, the market may struggle to rise above 28,000 points.
A-shares ETFs may stabilize, as the Shanghai Composite Index may hover around 4,000 points thanks to solid support from state-owned companies and listed firms.
Nevertheless, that could lead to a dilemma for the mainland government, as they may need to stay in the market for a long time, and investors may not be able to reap significant profits in the short term.
Meanwhile, state-owned plays may lack upside momentum for lack of government fund support.
Investors should also review their holdings of policy-driven stocks.
This article appeared in the Hong Kong Economic Journal on July 14.
Translation by Julie Zhu
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