25 October 2016
Hong Kong property plays may trade in a range until 2017. Photo: Bloomberg
Hong Kong property plays may trade in a range until 2017. Photo: Bloomberg

Why Hong Kong stock market may rebound further

The Hang Seng Index rose to 23,423 points at the beginning of the last week of October thanks to Beijing’s double-barreled easing move.

The Hong Kong market may rebound further to a “golden ratio” of 0.5 (that is, the size of the bounce may reach half the size of the preceding decline), as the International Monetary Fund may soon include the renminbi in the currency basket for its special drawing rights (SDR).

Also, MSCI Inc. may soon review whether to include A shares in its key Emerging Markets Index, and mainland banks and companies will release quarterly results.

The People’s Bank of China announced reductions Friday in interest rates and the reserve requirement ratio (RRR) for banks, as expected by market participants.

The PBoC has cut interest rates by 1.65 percent so far, and there is room for another 0.75 percent cut and a further 3-4 percent reduction in the RRR.

The central government intended to stabilize growth ahead of the fifth plenary session of the Communist Party’s 18th Central Committee.

However, it remains unclear how the easing measures can stimulate the real economy.

The removal of the cap on deposit rates is a big step toward liberalizing the financial market and enhances market expectations for the renminbi to be included in the SDR basket.

The Hong Kong market has undergone the usual profit-taking correction after the double-barreled easing shot, which is seen as stemming the risks of deflation or a hard landing.

These measures will boost A shares in the medium term.

The US Federal Reserve is unlikely to raise interest rates during its meeting this week.

There is a 30 percent chance of a Fed liftoff before year-end and 50 percent chance in January.

It remains uncertain whether the Fed might impose a modest rate hike to defend its credibility.

Investors should accumulate some A-share exchange-traded funds, like iShares FTSE A50 China Index ETF (02823.HK) and CSOP China A50 ETF (02822.HK), during market corrections in coming weeks, as the Chinese central bank is set to ramp up monetary easing as part of government efforts to stabilize the stock market.

China AMC CSI 300 Index ETF (03188.HK) is even more attractive if you believe Shenzhen-Hong Kong Stock Connect will be approved before the end of the year.

This week, President Xi Jinping and Premier Li Keqiang will outline the 13th five-year plan, which will set the tone for personnel shake-ups and planning for the next five years.

Sectors or individual stocks that can benefit from the reform of state-owned enterprises will outperform in coming months.

These include shipping, oil, telecom, airline and other red-chip companies.

Hopefully, the consolidation efforts will achieve a win-win for all parties.

Meanwhile, stocks that are relevant to healthcare, food safety and environmental protection will also benefit in the 13th five-year plan.

And some innovation plays that target domestic consumption are good bets for medium- and long-term investment, as the government is keen to switch the growth engine to the new economy.

The Centa-City Leading Index for private properties dropped this month, in a sign that prices of used housing in Hong Kong are easing.

However, housing prices may not slump if interest rates continue to be low.

The 2017 election for Hong Kong’s chief executive may be critical for the housing market.

Hong Kong property plays may trade within a range until we arrive at a turning point in 2017.

By contrast, second-tier mainland property stocks have more upside, as the double-barreled easing shot has unleashed more demand, and property developers there have better access to debt financing in the domestic market to ease their high debt burden.

Investors could take a look at Guangzhou R&F Properties Co. Ltd. (02777.HK), Greentown China Holdings Ltd.(03900.HK), Evergrande Real Estate Group (03333.HK) and Agile Property Holdings Ltd. (03383.HK).

This article appeared in the Hong Kong Economic Journal on Oct. 27.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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