The US Federal Reserve kept its policy interest rate unchanged last week, which is in line with my expectation. This week the market is closely watching the meeting between Chinese leader Xi Jinping and US President Barack Obama Xi as well and Fed chief Janet Yellen’s remarks.
Market participants are still divided over the timing of the Fed liftoff. Whether it comes in October, December or even early 2016, the decision really depends on the latest economic data and external environment.
The rate hike is likely to be very limited given the economic growth and inflation outlook in the United States and other parts of the world.
The market is also focusing on capital flows. The strength of the US dollar in last eight to nine years has created massive carry trade. Will there be any risk for unwinding given the excessive US dollar assets?
The US stock markets have responded calmly to the Fed’s decision to delay the rate hike, which indicates that US equities are more likely to level off due to earnings and valuation concerns. It remains unclear whether the market would speculate on the possibility of another quantitative easing, or QE4.
Meanwhile, the Chinese currency should have limited downside on the back of Beijing’s strong support. As the world’s second-largest currency, the Chinese yuan has depreciated around 3 percent in previous weeks. By contrast, the US dollar index already lost 2 percent recently. We should not be overly pessimistic about the redback.
Investors should evaluate the potential risk of unwinding positions on the US dollar carry trade. Hong Kong and China equities will trade sideways, and investors should focus on specific stocks in the Hong Kong market in the last quarter of this year.
The market will closely follow the Obama-Xi summit. I already noted last week about the significance of their meeting. Investors will reap good profit if they can make investment decisions in advance.
During their talk, the Chinese leader will stress the mutual benefits and win-win aspects of their two countries’ ties, while Obama will seek more benefits for US corporates while expressing his country’s intention to maintain its presence in the Asia-Pacific.
I will focus on issues relevant to investment and equities.
First, will they achieve consensus on how to stabilize the global financial market. Yellen has repeatedly cited the impact of uncertainties in China’s economy, currency and equities on the US and the whole world. That’s part of the reasons why the Fed delayed the liftoff.
The US and China will be able to reach agreement on how to maintain global financial order, which would help mitigate capital outflow from emerging markets as a result of recent yuan devaluation.
Beijing is happy to ramp up fiscal investment to stem the economic slide, which would help restore investor sentiment and stabilize the market.
Also, 15 Chinese chief executives and 15 US CEOs will join the US-China Business Roundtable in Seattle during Xi’s visit. The make-up of these 30 companies will shed some light on areas and sectors where both countries are seeking cooperation.
Apple and Cisco are paired up with Alibaba and Tencent (00700.HK), Boeing with China State Construction Engineering Corp. (CSCEC) and China Ocean Shipping Co. (COSCO), DuPont and Dow Chemical with China’s Yuhuang Chemical Industry Group, and Walt Disney, PepsiCo and Starbucks with China’s Yili Group and Haier Group.
These companies all benefit from mutual investment, and the CEO roundtable is set to become a catalyst for related stocks. The SOE reform will center around CSCEC and COSCO, and we’ve seen far more private companies this time, which is a good sign of Beijing’s willingness to further open up the sector.
I’m focusing whether the two sides will provide a stable environment for the rest of the year and reduce political and economic frictions. That will pave the way for China to press ahead with its “One Belt, One Road” strategy.
The market turmoil in Hong Kong has provided a good lesson for investors to pick good stocks. I tried to list a basket of good-performing stocks with a market cap of over HK$10 billion, and I would usually take notice if the 10-day moving average hits above the 50-day moving average, as well as other metrics.
Below are 15 stocks that fit all these gauges:
Quality stocks that are suitable for holding: ZTE Group (00763.HK), China Taiping Insurance Holdings (00966.HK), Sino Biopharmaceutical (01177.HK), AAC Technologies Holdings (02018.HK), Yue Yuen Industrial Holdings (00551.HK), China Railway Construction (01186.HK) and Cheung Kong Infrastructure Holdings (01038.HK).
The second group will offer aggressive investment value: SmarTone Telecommunications Holdings (00315.HK), China Foods Ltd. (00506.HK), Alibaba Pictures Group (01060.HK), Man Wah Holdings (01999.HK), Zall Development Group (02098.HK), Shanghai Fosun Pharmaceutical Group (02196.HK), Guorui Properties (02329.HK) and Beijing Enterprises Clean Energy Group (01250.HK).
This article appeared in the Hong Kong Economic Journal on Sept. 22.
Translation by Julie Zhu
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