24 October 2016
The mainland and Hong Kong markets are likely to remain range-bound in the fourth quarter. Photo: Reuters
The mainland and Hong Kong markets are likely to remain range-bound in the fourth quarter. Photo: Reuters

Golden ratio suggests Hong Kong market will rebound further

The Hong Kong market is likely to hover in the 20,000-24,000 point range in the last quarter of this year, as the US interest rate hike is still out of sight and China’s growth is stabilizing.

As I’ve noted before, the Hong Kong market usually goes through two or three major rallies each year and trades range-bound for the rest of the year.

It seems that the market has found a ceiling between 23,000 and 24,000 points.

The mainland and Hong Kong markets are not very expensive at current levels, which could become a strong support level.

However, Beijing’s various market rescue measures may keep foreign investors away.

In the next six months, the US rate hike is likely to be very modest, and investors will continue to favor US bonds.

The Hang Seng Index has already rebounded more than 10 percent from the trough of 20,368 points to a ceiling of 23,000 points.

The upside will remain limited in the future for lack of a push from heavyweight stocks like mainland banking stocks.

Investors who accumulated these stocks at low prices can take some profit.

Some individual stocks with policy support are suitable for short-term speculation, and investors should take quick profits, as the market is less sensitive to policy incentives.

Professional investors should use options or other derivatives to profit from the ups and downs of the Hang Seng Index or Hang Seng China Enterprise Index.

Investors should keep investment in equities at 30-40 percent of their portfolio in the fourth quarter, as we don’t see a major uptick.

The Hong Kong Monetary Authority has kept injecting liquidity into the market, and one possible reason is to create a stable market for the two recent new listings of China Reinsurance (Group) Corp. (01508.HK) and China Huarong Asset Management Co. (02799.HK), which raised up to HK$37 billion.

The market won’t undergo a deep correction before the upcoming fifth plenary session of the 18th Communist Party Central Committee.

As the market continues to switch among different sectors, investors should use the so-called “golden ratio” of 0.382 —  the ratio often seen between the height of a bounce and the depth of the previous fall — to find individual stocks.

In fact, the “golden ratio” predicts the Hang Seng Index should rebound to 23,508 points from the low of 20,368 points.

And the upside is likely to be limited to 24,478 points, based on another frequently seen ratio of 0.5.

Meanwhile, the China Enterprise Index may rebound to 11,313-12,010 points.

With the latest growth in China’s gross domestic product of 6.9 percent, Beijing will continue to try to stabilize growth by maintaining monetary easing and infrastructure spending.

Certain sectors will benefit from policy support, and investors should accumulate the related stocks at the right time.

Meanwhile, some nuclear, high-speed railway and finance plays may become sought-after in the short-term, as President Xi Jinping has arrived in Britain for a four-day state visit.

However, some investors may take profit after bilateral cooperation projects are announced.

Whether Xi’s visit to Britain can ease concerns about the outlook for China’s economic growth and restore market confidence is critical to global capital flows in equities.

This article appeared in the Hong Kong Economic Journal on Oct. 20.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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