28 October 2016
The Hong Kong market is likely to stage an uptick in the last quarter. Photo: HKEJ
The Hong Kong market is likely to stage an uptick in the last quarter. Photo: HKEJ

What investors should watch out for in the fifth plenary session

Hang Seng Index rebounded to over 23,000 points from a low of 20,368 points last week. It seems the market has completed its consolidation. Some analysts believe the index would rise further after breaching the 50-day average.

However, I’ve predicted that the market would trade range-bound in early October, given the reduced liquidity and various economic and political uncertainties. The market may lack further upward momentum after rebounding to a resistance level of around 23,000 points.

We’ve seen that strong plays have already peaked out while oversold sectors like Macau gaming and raw material stocks have posted the biggest rallies recently.

The 18th CPC Central Committee will hold its fifth plenary session on Oct. 26-29, and unveil the blueprints for the 13th Five-Year Plan. I noted last week that Beijing would release some pro-growth measures to stabilize the market before the meeting.

Various official and market sources said China’s GDP growth may ease further in the third quarter, and there is little chance to see marked improvement in the last quarter or even the first quarter of next year.

Beijing will unveil some short-term stimulus measures for certain sectors. Last week, it has released supportive policy for new energy vehicles and reduced the down payment ratio for homebuyers.

The five-year plan will focus on medium-term support measures for various sectors, which will serve as a guide for investors to channel their capital into related industries.

However, those theme-driven plays may go through a correction in view of the difficulty of implementing government stimulus measures. Medium-term investors could take the opportunity to collect attractive stocks.

It’s not easy to reverse the weak real economic growth and company earnings in the short term.

However, positive expectations stemming from various policy incentives would drive the market in the last quarter. That would lure some foreign investors to return to the Hong Kong and mainland markets.

The region could become interesting again in the emerging market bracket, as A shares have already undergone substantial deleveraging after Beijing’s various market rescue measures.

The Hong Kong market is likely to stage an uptick in the last quarter along with improving sentiment toward A shares. Investors could collect some stocks with poor quarterly results this month.

China’s central bank announced over the weekend that it would expand the pilot program on credit-asset pledged re-lending to nine municipalities and provinces, including Shanghai, Tianjin, Liaoning, Jiangsu, Hubei, Sichuan, Shaanxi, Beijing and Chongqing.

The move is expected to cut borrowing costs and guide more funds into agriculture and small enterprises to boost the real economy.

The move is aimed at motivating commercial banks to lend more to small private businesses and the agriculture sector.

This incremental liquidity can be viewed as targeted easing, and the scheme can also help mitigate bad loan risks for both local and central governments.

Beijing has announced the measure ahead of the fifth plenary session in a sign that Beijing is determined to safeguard growth with various measures for rest of this year.

Relevant sectors include “Internet plus”, new energy vehicles, infrastructure, home appliances and biotech healthcare.

Some attractive stocks are Tencent Holdings (00700.HK), GCL-Poly Energy Holdings (03800.HK), GOME Electrical Appliances Holding (00493.HK), Ping An Insurance Group Co. of China (02318.HK), PICC Property & Casualty (02328.HK) and China Taiping Insurance Holdings (00966.HK).

Many of these stocks have become highly sought-after by short-term speculators, and more capital is set to chase these plays if Beijing unveils more detailed measures.

Shipping, military, oil and telecom plays that have potential for reform and consolidation could become hot targets again, as some companies in these sectors are reportedly planning a unit spin-off or leadership shake-up.

Personally, I favor the healthcare sector, which is closely linked with the well-being of such a big population.

Meanwhile, some financial plays may show further signs of slowdown in their third-quarter results, and investors should collect these plays after the results. Stocks that have consolidation potential usually report an earnings decline or even a loss.

Defensive stocks like power, gas and cement are attractive for medium-term investment if they are bought at a low level.

This article appeared in the Hong Kong Economic Journal on Oct. 13.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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