22 October 2016
China's market correction has squeezed the bubble from small-cap and theme-driven stocks. Photo: Reuters
China's market correction has squeezed the bubble from small-cap and theme-driven stocks. Photo: Reuters

How investors can prepare for a market rebound

China’s slowing growth and yuan devaluation have caused ripples across the world.

Foreign investors now believe Beijing needs more time to restructure the economy. Amid the uncertainties, there has been acceleration in capital outflow, which took a toll on stock markets in both the mainland and Hong Kong.

Hong Kong’s benchmark Hang Seng Index is likely to hover around the 20,000 points level this month. Apart from China concerns, there is also uncertainty over the timing of an expected rate hike by the US Federal Reserve.

While investors are likely to remain cautious for a few weeks, a rebound in the equity markets is however possible in the final quarter of the year.

The market correction in the last two months has squeezed the bubble from small-cap and theme-driven stocks. Now, 20 to 30 percent of the firms have returned to a territory where there is strong support.

Chinese company plays now have an average P/E multiple of less than 10, as a result of weaker yuan and fears of a hard-landing for the economy.

Following the recent steep correction, the Hong Kong market is moving into a consolidation stage at the bottom. Any further deep slide in the near term will be short-lived.

Looking around, there is no particular outperforming asset worldwide. This could help mitigate any further selling pressure in the Hong Kong market, which has already posted a record-low P/E ratio.

Beijing, meanwhile, has the ability to stem off any systemic risk, given the array of intervention tools and policy measures and the semi-open financial markets.

China’s foreign-exchange reserves plunged by US$93.9 billion to US$3.557 trillion in August from the month before. The reserves have dropped by more than 10 percent from a peak of nearly US$4 trillion in June 2014.

The government is facing more pressure to stabilize the currency and reduce capital outflow. The renminbi has bid farewell to the long-time appreciation path. Reforms are needed before the country can move toward full currency convertibility.

Given this situation, investors should search for industries that will benefit from a more flexible foreign exchange regime.

They can also collect some mainland healthcare and consumer staples stocks. Elsewhere, medium-term investors can place some bets on mainland property and manufacturing plays which could benefit from lower financing costs.

Foreign investors have stayed away from Hong Kong and mainland markets in light of Beijing’s aggressive market intervention measures. The move by foreign investors marks a U-turn from their previous stance of active participation in the world’s largest emerging market.

Amateur investors should look at the market fluctuations calmly before deciding where to put their money.

Due to monetary easing by major world central banks, the global market is awash with liquidity. However, the capital lacks direction and can’t find a real safe haven, given that equities, currency, bonds and property all move in tandem with each other.

Some markets have been absorbing the excess global liquidity, becoming a battlefield for speculators.

Global markets can offer more investment options, but individual investors can easily become targets there for big speculators.

Given the risks, people should diversify their investments and put in place well-balanced portfolios.

While their reducing leverage, investors should also seize opportunities presented by the market downturn to collect stocks of firms that have good governance, sound business models and robust medium to long-term prospects.

This article appeared in the Hong Kong Economic Journal on Sept. 8.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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