20 October 2018
Stocks in Shanghai and Shenzhen posted gains in November, showing bearish foreign sentiment has not had much impact on these markets. Photo: CNSA
Stocks in Shanghai and Shenzhen posted gains in November, showing bearish foreign sentiment has not had much impact on these markets. Photo: CNSA

Why this month calls for market caution

The Hang Seng Index ended November 2.84 percent lower and the China Enterprise Index lost 5.83 percent on the month.

By contrast, the Shanghai and Shenzhen markets both reported positive gains during the month.

That showed the bearish sentiment of foreign investors did not affect A shares.

The markets were reacting to measures earlier unveiled by Beijing to stabilize the financial market after share prices collapsed last summer.

In two weeks, fund managers are expected to wind up their positions for the year.

They adjusted their portfolios after the inclusion of US-listed Chinese stocks int the MSCI, helping drive daily turnover to HK$100 billion (US$12.9 billion).

However, the MSCI move may have had limited upside for individual stocks.

For example, Tencent Holdings (00700.HK) rallied despite selling pressure.

By contrast, China Mobile (00941.HK) and a number of Chinese financial stocks weakened due to technical selling but some small and medium caps performed relatively well.

The inclusion of the Chinese yuan in the International Monetary Fund’s SDR (special drawing rights) basket will bolster its internationalization in the medium and long run.

However, if the renminbi’s weighting is below market expectations, it could trigger a sell-off.

Also, upcoming economic data from the US and China could be an excuse for speculation, leading to volatility.

The 10-day average of the Hang Seng Index remains above the 50-day average.

In this case, the market could take a U-turn when the trend reverses course.

Most fund managers and big investors will make their final adjustments before the year-end review, which could offer clues to the market’s future direction.

Investors have been sensitive to political risk lately.

The inclusion of A shares in MSCI and the Chinese yuan’s entry to the SDR basket, coupled with market expectations for a 0.25 percent or 0.125 percent rate hike in the US, have had limited impact on the global economy.

There is no game-changer in sight despite geopolitical risks in the Middle East and over the South China Sea issue.

Investors should keep calm and cap their stock market exposure.

Hong Kong is likely to be volatile in the first half of December and it could tumble as low as 20,500 points once it hits 22,000 and 21,800 points.

Investors should take a conservative approach and reduce their stock exposure to 20 percent of their portfolio.

In addition, foreign investors remain skeptical about Chinese stocks.

As a result, policy-driven plays could produce a short-lived rally.

I have suggested earlier that investors should collect these stocks amid a quiet market.

For example, a number of environmental counters might outperform in the short term after China responded positively to the Paris climate summit.

Electric carmakers such as Geely Automobile Holdings (00175.HK), BYD Co. (01211.HK) and Great Wall Motor (02333.HK) are likely to be in favor.

However, investors should not hold these stocks for long-term investment as a large number of new entrants usually leads to overcapacity.

Also, they need to pay a hefty premium for these stocks which have already priced in future earnings growth.

Also, investors should take advantage of a market correction to buy new economy stocks such as internet companies.

Online shopping has transformed the buying habits in China and the US as we have seen in the recent shopping festival boom.

This article appeared in the Hong Kong Economic Journal on Dec. 1.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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