22 October 2019
President Xi Jinping and US President Barack Obama talk to the press after their meeting in Washington last week. Photo: Bloomberg
President Xi Jinping and US President Barack Obama talk to the press after their meeting in Washington last week. Photo: Bloomberg

Why market will not rebound until late October

The Obama-Xi meeting has concluded neutrally for the market.

The Hong Kong market still lacks a substantial catalyst given that the mainland market will take a one-week holiday and investors will wind up futures positions at the end of the quarter.

Hong Kong’s market is likely to form a floor at around 20,000 points within the fourth quarter if the US Federal Reserve’s liftoff comes in October.

The Hong Kong market may also post a good rebound then.

Investors should continue to keep stock exposure at 30 percent of their portfolio amid current heightened market volatility and wait for buying opportunities during each round of panic selling.

Many funds in Hong Kong have suffered heavy loss in the third quarter, as they started to reduce holdings only in July and August.

The continued capital inflows into Hong Kong show that these funds are not facing too much redemption pressure.

However, there is little chance of massive buying until the market has found its floor.

And fund managers are waiting for panic selling to buy ahead of the inclusion of A shares in a key MSCI index next year.

Late this month might be the best buying window.

President Xi Jinping’s US visit shows that both countries are keen to maintain stability.

They only reiterated their stances on sensitive issues like the South China Sea and human rights, and both leaders did not touch upon Japan at all.

US companies have been awarded large orders, and Beijing pledged to cooperate in fighting cybercrime.

Meanwhile, Xi also tried to ease market concerns about Beijing’s intention to slow down the process of economic reform.

In fact, Chinese authorities already implemented some inappropriate market rescue measures.

The market will resume its normal operations after stabilizing.

Investors have to understand and prepare for policy risks when investing in a gradually opening emerging market.

Xi also noted that there is no basis for a continuous depreciation of the renminbi.

The daily fixing has already achieved some progress, and there is little chance of a further deep weakening of the redback.

So, it should not be a trigger for the free fall of other emerging market currencies.

However, an orderly and moderate depreciation of the renminbi is set to occur in the medium term.

Xi said the “recent abnormal ups and downs” in the market had now reached “a phase of self-recovery”.

That indicates the central government will reduce market intervention, and thus A shares may continue to fluctuate in the short term.

But Beijing’s new stance may help restore the confidence of foreign investors in the China market.

In fact, the selling of A shares is now dominated by mainland investors, and foreign investors have very limited impact on the mainland market.

That’s why H shares are a thermometer for gauging foreign investors’ interest in the China market.

Xi pledged to keep China’s economic growth at around 7 percent and double its gross domestic product by 2020.

As a result, foreign investors may become less pessimistic about China in the last quarter of this year.

The latest remarks of Janet Yellen show that the Fed’s liftoff is set to take place this year.

The US market reacted with a rally on lessened uncertainty surrounding the liftoff.

Yellen has changed her stance after the Obama-Xi meeting, voicing concerns about the strength of the US dollar, financial market turmoil as well as the slowdown in China’s economic growth.

I expect the Hong Kong market to stage a satisfactory rally in the fourth quarter.

If China intends to achieve its 7 percent growth target this year, Beijing will unveil more stimulus measures, like accelerating the reform of state-owned enterprises.

The Chinese currency may continue to fluctuate, but it won’t slide further for the rest of this year.

Global financial markets may go through some short-term volatility around the Fed meeting to be held in late October.

The US dollar may lose some strength after the rate hike.

And global stock markets may suffer another crisis if global capital continues to flow into US dollar assets.

However, various countries are adopting loose monetary measures, and China also relaxed its tight grip, so the extreme case is unlikely to happen.

As I’ve pointed out earlier, there is little chance of a global bull or bear market, or high inflation or a big recession, either, given active intervention by major central banks.

Investors should take advantage of the expectation of these “black swans” to make money.

This article appeared in the Hong Kong Economic Journal on Sept. 29.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal