The Hong Kong stock market has become unpredictable due to uncertainties surrounding mainland and foreign capital. In this situation, what should one do?
If you are a conservative investor, I would advise you not to increase your equity exposure, or speculate about a peak or engage in short-selling. It’s very difficult to outperform the benchmark amid a range-bound market.
However, aggressive investors may take a different approach given the current low cost of capital. Individual stocks or sectors won’t have too dramatic ups and downs in the coming months following the market crash in the third quarter, and given Beijing’s efforts to stabilize the Chinese market.
Investors who have more risk appetite can seek bets for short-term investment, and take half of the profit every time a stock reaches a target level.
Also, they could collect some strong individual stocks and sectors during each correction. However, big investors usually go against the crowd in a range-bound market. There is high concentration of “smart money” in the market, which makes certain stocks move unexpectedly.
Meanwhile, new economy plays are likely to outperform in the future, in particular a number of internet plays that have issued American Depository Receipts. They will benefit from market hype about the “Double 11″ online shopping festival and expected inclusion of A-shares into the MSCI.
Elsewhere, brokerage and mainland banking stocks are also attractive.
In the wake of the positive response in the market to news of China IPO resumption, the central government might give the green light for the Shenzhen-Hong Kong Stock Connect.
In this case, investors should move in advance. Hong Kong Exchanges and Clearing (00388.HK) can benefit directly from the scheme, apart from some financial plays.
We’ve already seen steadily improving market turnover in Hong Kong and the mainland.
Investors can collect some mainland brokerage stocks during corrections, as the firms will benefit from improved trading activity in A-shares. Citic Securities (06030.HK) and Galaxy Securities (06881.HK) will be among the companies that can benefit.
China International Capital Corp. (CICC, 03908.HK), which made its debut in Hong Kong on Monday, is also attractive for short- and medium-term investment as the mainland investment bank has strong business connections and a large customer base.
China lifted the IPO ban last week after careful thought. The move sent a positive signal to investors and added weight to remarks by top Chinese leaders that China’s stock markets have stabilized.
There are 28 new listings approved within this year, involving around 10 billion yuan in fund-raising. The IPO resumption won’t a big drag on market liquidity.
Meanwhile, mainland banking stocks are already at attractive levels. Monetary easing measures have reduced debt burden for companies and eased bad loans risks.
Banks play a key role in Beijing’s efforts to stimulate economic growth. And Chinese banks have some good assets for securitization.
ICBC (01398.HK), Bank of Communications (03328.HK) and China CITIC Bank (00998.HK) look good from the investment perspective.
This article appeared in the Hong Kong Economic Journal on Nov. 10.
Translation by Julie Zhu
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