27 October 2016
H shares haven't followed the trend of their mainland counterparts too closely, and they will remain in the hands of foreign investors, unlike some A shares. Photo: HKEJ
H shares haven't followed the trend of their mainland counterparts too closely, and they will remain in the hands of foreign investors, unlike some A shares. Photo: HKEJ

Why market correction will continue in August

Capital continues to flow from Chinese stocks amid disappointing economic data and with the looming prospect of US “lift-off”.

Many analysts suggest that Chinese stocks are not expensive, and H shares have retreated to technical support levels.

However, many Chinese institutions bought shares during the market crash in July at the request of the central government.

They have spent nearly 60 billion yuan (US$9.67 billion) on net buying of stocks last month.

Any withdrawal of the market rescue measures could lead to a renewed sell-off.

Mainland insurance and brokerage companies are expected to release interim results soon.

However, the market turmoil in July has yet to be reflected in their earnings.

Therefore, big shareholders and management won’t give pessimistic comments on the market outlook, which would prompt foreign investors to reduce their holdings in light of increased uncertainty.

Investors holding strong stocks should watch closely any sell-off in these plays, as smaller stocks have already tumbled considerably.

And some fund managers would opt to take profit in these stocks with good earnings and liquidity if they face redemption pressure.

Therefore, stocks with national policy support or in the aerospace, mainland banking and brokerage sectors, as well as stocks relevant to the “one belt, one road” strategy could all become targets for cashing out.

As a result, the Hang Seng Index could test a low of 24,000 points.

That would offer a good buying opportunity for medium-term investors.

Sell-offs in these good stocks is usually a prelude to the market bottoming out.

Short-term investors should buy low and sell high around 1,000 points away from 24,500 points, while medium-term investors should buy at 22,800 to 24,000 points.

Brokerage stocks have outperformed in recent years as they rode on the leveraging trend in the domestic market and expanded through acquisitions.

Another group, of new-economy stocks, also benefited from China’s economic restructuring.

However, Beijing has recently tightened rules on online payments, which could spark a sell-off of these stocks.

Chinese authorities have placed a top priority on maintaining financial stability.

Therefore, investors might suffer at any time from the policy risk embedded in the new economy.

Even Alibaba Group Holding Ltd. is falling gradually out of favor with the top leaders.

Investors should avoid internet technology stocks in the short term.

Shanghai-Hong Kong Stock Connect has linked the two markets more closely.

However, while the Hong Kong market benefited from red-hot mainland market sentiment in early April, it has become the target of a sell-off by foreign investors during the market turmoil.

As I’ve pointed out before, the stock trading link has benefited A shares more, as more liquidity has flowed northbound.

A shares posted a whopping gain last year on the back of government support and progressing financial reforms.

However, the path of the stock market has deviated from economic growth in the mainland.

In fact, China’s domestic equity market decoupled from the country’s stunning growth in gross domestic product over the last decade.

Now the future direction of A shares still depends on Beijing’s policy decisions and implementation.

Nevertheless, the Hong Kong market has not entirely followed the mainland market.

The price gap between A shares and H shares kept widening as the Shanghai Composite Index hit a peak of 5,000 points.

The prospects for H shares will depend on foreign money inflows and views about China’s political and economic environment.

H shares have been left alone, without any direct market rescue efforts by the Chinese authorities.

Still, H shares will remain in the hands of foreign investors, who have been criticized for their involvement in A shares in recent months.

This article appeared in the Hong Kong Economic Journal on August 4.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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