Date
23 March 2017
The Shanghai stock exchange has seen some steep ups and downs in the past  year. The benchmark index began 2014 at 2,200 points, surging to 5,000 points earlier this year before slumping to 4,000. Photo: Bloomberg
The Shanghai stock exchange has seen some steep ups and downs in the past year. The benchmark index began 2014 at 2,200 points, surging to 5,000 points earlier this year before slumping to 4,000. Photo: Bloomberg

Is it time to rethink the 10-year cycle theory?

How many decades do we have in our life?

After having crunched statistics in the Hang Seng Index for the past four decades, we have found a way to make a fortune.

The 10-year cycle theory states that investors should buy stocks in February and March and take profit when the market peaks in July.

However, both the Hong Kong and mainland markets have seen a bust in the past two months.

The confusion caused by Beijing’s market rescue efforts scared away individual investors.

Meanwhile, foreign investors used the Hong Kong market to speculate on China and bearish market sentiment is spreading.

Investors should have reaped profits if they entered the market between 2012 and 2013.

It’s time for a mid-term review.

Investors could take reference from market cycles but sometimes the market doesn’t follow a particular pattern.

We mentioned the best time to buy is in late June and the perfect time to sell is July.

But even that pattern has also been broken.

There are two things investors should consider in the new version of the 10-year cycle theory.

First, the market went through a marked correction in the middle of the cycle.

For example, the Hang Seng Index doubled to 12,600 points in early 1994. Investors would have benefited if they had entered at around 5,500 points in early 1993.

However, the market took a tumble to 6,900 points in early 1995 and did not rebound to 16,820 points until 1997.

Is it possible that the market had a correction in 2015 before the 2017 rally?

Investors in Hong Kong and the mainland should think about this.

Second, there is always a market rebound window in the same year and one year after the Hang Seng Index plunged such as in 1978, 1988, 1998 and 2008.

That’s in line with the saying of the famous investor Cho Yan-chiu that a market slump is a good entry opportunity.

In light of recent market weakness, I suggested in late July that investors should reduce their holding to 30-40 percent of their portfolio.

The market is set to post one or two technical rebounds in the short term.

Last week, the market focused on central SOE reform, monetary easing and stepped-up fiscal stimulus.

That was an opportunity for speculation in lagging old-economy stocks.

However, it’s more difficult to make a profit in the present market situation which deviates from the repeated cycle of one or two big rallies and three to four modest rises in a year.

Should investors still stick to the 10-year cycle theory?

The positive and negative factors in both markets remain little changed — a stronger yuan affects exports, deleveraging triggers corrections, US rate hike expectations drive up the US dollar and lures capital out of the region.

And the frequent occurrence of positive and negative factors makes it hard to predict their real impact, leading to increased volatility.

The so-called “new normal” is likely to extend into 2017.

World stock markets have rarely posted a cumulative rise above 50 percent in the past two years.

The US market witnessed a 20 percent rally in 2013, followed by a 10 percent rise in 2014 but it has seen little movement this year.

Japan clawed back 80 percent between 2013 and 2014 but the real return was less than 40 percent, taking currency depreciation into account.

The situation is quite similar in India.

The Shanghai Composite Index began 2014 at 2,200 points, surging to 5,000 points earlier this year before slumping to 4,000.

Nevertheless, it remains the best performing market.

The recent yuan devaluation, coupled with targeted easing measures and some help from the “national team”, will support the market around 4,000 points.

Foreign investors are critical to the Hong Kong market but fund inflows will depend on the pace of yuan weakening and a potential regional currency war.

It’s possible that the market could outperform in the fourth quarter if capital flows subside in the third quarter.

The Hong Kong market will continue to trade range-bound since deleveraging pressure has eased in the mainland.

Fund managers are ramping up their cash positions in light of sell-off pressure ahead of a US rate hike.

Investors should take 24,500 points as the axis level and sell or buy if the benchmark rises or drops more than 1,000 points.

Domestic investors and businessmen are more cautious and conservative when the market is focused on a rate hike, rising property prices and a weaker yuan.

This article appeared in the Hong Kong Economic Journal on Aug. 18.

Translation by Julie Zhu

[Chinese version中文版]

– Contact us at [email protected]

JZ/JP/RA

 

How many decades do we have in our life? After analyzing the statistics in Hang Seng Index for the last four decades, we’ve found an easy way to make fortune. The 10-year cycle theory shows that investors should buy stocks in February and March, and take profit when the market peaks in July.

 

However, both Hong Kong and mainland markets have seen continued bubble burst in last two months, and the confusion and chaos caused by market rescue efforts have scared individual investors away.

 

Meanwhile, foreign investors have utilized Hong Kong market to speculate on China market, and the bearish market sentiment is spreading. Investors should have reaped good profit if they enter the market between 2012 and 2013. It’s time to make a mid-term review.

 

Data shows that investors could take reference from market cycles, however, sometimes market won’t follow the pattern. We’ve mentioned before that it’s time to buy stocks in late June as the market has rallied in July through last decade. However, the pattern has also been broken.

 

There are two points that investors should pay attention in the new version of the 10-year cycle theory. First, the market has gone through marked correction in the middle.

 

For example, the Hang Seng Index has doubled to 12,600 points in early 1994, if investors have entered around 5,500 points in early 1993. However, the market has taken a deep dive to 6,900 points in early 1995. And it has rebounded to 16,820 points until 1997.

 

Therefore, is it possible that the market has taken a correction in 2015 ahead of the upcoming rally before 2017? Investors in Hong Kong and mainland markets should think about this.

 

Second, there is always a good window of market rebound within the same year and one year after the Hang Seng Index plunged, such as in 1978, 1988, 1998 and 2008. That’s in line with the saying of famous investor Cho Yan-chiu that ‘it’s a good entry opportunity during market slump’.

 

In light of recent market weakness, I’ve suggested in late July that investors should reduce their holdings to 30 or 40 percent of their portfolio. The market is set to post one or two technical rebound in short term.

 

The market has focused on central SOE reforms, monetary easing and stepped fiscal stimulus last week. That has rendered opportunity for speculation in lagging old-economy stocks. However, it’s more difficult to reap good profit amid current market situation, and deviates from the repeated cycle of one or two big rallies and three to four times of modest rise within each year.

 

Should investors stick to the 10-year cycle theory any more? The positive and negative factors in both markets remain little changed, such as stronger yuan affects export, deleveraging effort triggers correction, US rate hike expectation drives up US dollar and lured capital out of the region.

 

And the frequent occurrence of positive and negative factors are hard to predict the real impact, which has led to increased volatility in both Hong Kong and mainland markets. The so-called “new norm” is likely to extend until 2017.

 

Worldwide stock market has rarely posted an accumulative rise of over 50 percent within two years. The US market has witnessed a rally of more than 20 percent in 2013, followed by a 10 percent or so rise in 2014, and little movement so far this year. And Japan market has staged a sharp jump of 80 percent between 2013 and 2014, and the real return was less than 40 percent if taking currency depreciation into account. It’s quite similar in India.

 

The Shanghai Composite Index has started at 2,200 points last year, and surged once to 5,000 points earlier this year before easing to current level of 4,000 points. Nevertheless, it remains the best-performing market. And appropriate yuan devaluation coupled with targeted easing measures as well as support from the “national team”, the market is likely to hover around 4,000 points.

 

The fund flow of foreign investors is critical to Hong Kong market, which would depend on the pace of further yuan weakening and a potential currency war in the region. It’s possible that the market could outperform in the last quarter after capital flow wraps up within the third quarter.

 

The Hong Kong market will continue to trade range-bound since mainland deleveraging pressure has been fading off, and fund managers have opted for increasing cash level in light of sell-off pressure ahead of US rate hike.

 

I’ve noted earlier that investors should take 24,500 points as the axis level, and sell or buy if the benchmark rises or drops over 1,000 points.

 

Both local investors and businessmen are more cautious and conservative, as the market is focusing on impact from rate hike, and peaking property market as well as negative impact from weaker yuan.

 

This article appeared in the Hong Kong Economic Journal on Aug. 18.

Translation by Julie Zhu

 

[Chinese version中文版]

 

– Contact us at [email protected]

 

JZ/JP/

 

columnist at the Hong Kong Economic Journal

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