26 October 2016
Stock markets should brace for uncertainty amid China's economic woes and expected shift in US monetary policy. Photo: Bloomberg
Stock markets should brace for uncertainty amid China's economic woes and expected shift in US monetary policy. Photo: Bloomberg

How investors can make money in choppy markets

I predicted in early September that the Hong Kong market will consolidate in the 20,000 to 22,500 points range on the benchmark index.

Last week, sentiment became more fragile ahead of the week-long National Day Holiday and quarter-end portfolio reviews.

I warned that the market could tumble as much as 1,000 points within the week.

In line with my expectations, the market dropped to a two-year low of 20,368 points last week. However, it rebounded to 21,500 points within just two trading days.

With the quick 1,200-point fluctuation, individual stocks also went through sharp volatility, offering investors an opportunity to make some quick money.

The market is likely to resume consolidation next month, and offer traders a chance to take some fresh bets before the year-end. The benchmark index might rally to 23,000 points before heading south again. 

Meanwhile, the bears are viewing the current bounce as stemming from a covering of short positions, rather than any fundamental shift in near-term prospects.

Given the weak technical and economic fundamentals, short-sellers can be expected to step into the market again.

As a battle is played out between traders taking long and short positions, it will take a while before the dust settles.

It may take until the end of October for the worst to be over, which is when I would recommend ordinary investors to start collecting stocks again.

The market recovery will be helped by easing capital outflow from the region and expected pro-growth fiscal measures from Beijing.

More importantly, markets including A shares are in the middle of a bull market cycle, according to my 10-year market cycle theory. Hopefully, China reform may yield some results in 2017.

Beijing has been forced to turn cautious although it tried hard to make stock market as a key financing vehicle last year. Investors should wait for more hints from the next plenum of the central committee of the Chinese Communist Party.

Big investors will again dominate Hong Kong and mainland markets in the last quarter, increasing the chances for more volatility in equity prices. Against this backdrop, investors should pay more attention to individual stocks or sectors.

Capital flow has become the most useful metric for global investors, in particular for short and medium-term investment. 

Currently, both Hong Kong and mainland markets are struggling with less liquidity. Beijing won’t repeat its past mistakes after the painful de-leveraging in A shares. Also, the government’s top priority will be keeping the currency stable.

It may take some time for the mainland markets to recover given the nation’s economic slowdown and weaker earnings expansion.

It is estimated that emerging markets have seen capital flight of around US$4 trillion in the recent past. And Middle East nations like Saudi Arabia may need to further sell global equities and emerging markets stocks as they need to raise cash in order to deal with fiscal deficits arising from low oil prices.

The Hong Kong market is set to encounter unfavorable liquidity conditions when the US begins to tighten its monetary policy. The market could be confined to a tight range in the first half of 2016 after some rebound in this quarter.

In recent days, oversold stocks and sectors have drawn heavy interest. In particular, Macau gaming plays staged a strong recovery after some Chinese officials pledged support for the territory’s economy.

However, these remarks will provide only short-term relief for the gaming Industry. Investors should bear in mind that the recent rally stemmed mainly from short-covering activities, rather than anything else.

Ultimately, investors will do well only if they focus on firms with strong fundamentals, instead of getting carried away by temporary newsflow.

This article appeared in the Hong Kong Economic Journal on Oct. 6.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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