28 October 2016
China's stock markets may take some time to settle down after the battering in the past few months. Photo: Reuters
China's stock markets may take some time to settle down after the battering in the past few months. Photo: Reuters

Why stock markets may remain weak in September

After a turbulent August, equity investors worldwide are wondering what lies in store during the new month.  

People may need more time to digest the various uncertainties. Despite the recent sharp correction, the time may not be ripe to jump into the market yet.

I would advise investors to lie low for the time being and wait for a good entry point in the last quarter of the year.

The Chinese markets may stabilize temporarily due to rescue efforts by state financial institutions, the so-called “national team”, as Beijing prepares for a big military parade to commemorate the 70th anniversary of Japan’s defeat in World War Two.

Meanwhile, upcoming US employment data will offer more clues as to the timing of a rate hike by the Federal Reserve.

Fed vice chairman Stanley Fischer said over the weekend that there was “good reason” to expect that inflation would rebound to a healthier pace. His comments reinforced other recent indications that the Fed remains on course to raise interest rates this year.

The market will see a mix of good and bad news, and volatility is set to increase. In this situation, investors could engage in some short-term speculation, but medium-term players should remain on hold.

The Hang Seng Index is likely to set up a floor around 20,800 points and stay range-bound this month.

Interim results of corporates have not brought any big surprise to the market. That is particularly the case with some heavyweights like mainland banking plays which are struggling with asset quality deterioration and narrowed net interest margins.

China’s five largest banks have bad loans of 165.5 billion yuan. The economic slowdown, equities crash and a weaker renminbi are causing more uncertainties.

Given the recent negative developments, China-related stocks are unlikely to be favored by foreign investors for some time.

It remains to be seen whether Beijing’s double-barreled easing shot and pro-stability measures could help stimulate growth in the next six months and eventually restore market confidence.

There is talk that Beijing is keen to create a stable renminbi environment in order to assist reform and drive economic growth, which would then reduce government intervention in stock and foreign exchange markets and help revive investor confidence.

Still, I would recommend that investors maintain a wait-and-see stance. Historical experience shows that most individual investors tend to jump onto the bandwagon when the market is in the last legs of a rally, burning their fingers when the unwinding starts.

Most professional investors and big investors who are more sensible and value fundamentals have averted heavy losses. But individual investors who jumped in at peak levels have suffered a lot.

Market outlook remains gloomy from a technical perspective, and it remains difficult to predict if there will be a domino effect of various bad news.

China still faces various uncertainties, which may continue to affect market sentiment. Investors should continue to keep stocks at 30 percent of their total investment portfolio. They should wait for a good entry point when good stocks see heavy sell-off. 

As traditional funds review their allocations every quarter, any adjustment would impact capital flows, which will have a cucial bearing on the markets’ prospects.

If the market breaks below the 50-day moving average and fails to rebound to 250-day moving average within 10 trading days, that could be a prelude to a bear market.

The Hang Seng Index overshot the 10-day moving average on March 31 at 24,900 points, and soared to 28,588 points, rising above the 50-day moving average, on April 27, posting a rally of 3,700 points during the period. 

The benchmark dropped below the 50-day average to 26,687 points on June 10, and rebounded to 27,470 points on June 24. But it fell again and did not stage a rebound until it reached a trough of 20,850 points last week.

The data overall suggests that the 10-day and 50-day averages are a good indicator of the market trend.

This article appeared in the Hong Kong Economic Journal on Sept. 1.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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