28 October 2016
Fund managers have been chasing a number of new energy vehicle stocks. Photo: Xinhua
Fund managers have been chasing a number of new energy vehicle stocks. Photo: Xinhua

How to select stocks amid stalling economic growth

The Hang Seng Index is likely to trade in the range of 21,800 to 23,200 points as investors start winding up their positions for the year-end.

Investors should take a medium-term approach to selecting stocks in 2016.

China is mired in deflation and slowing economic growth. Beijing is wildly expected to further ease policy to stabilize growth.

As a result, the world’s three largest economies arrive at a critical point of divergent monetary policies. How will that affect the real economy and the markets in China, Hong Kong and the United States?

China’s renminbi remains the world’s second strongest currency, although it is now in the middle of downward cycle.

The redback is expected to weaken another 3 percent against the US dollar next year. Economic growth will determine how the US dollar and the Chinese yuan will fare in the future.

Major central banks may hold off buying more yuan-denominated financial assets in the next 10 months amid expectations that the Chinese currency will further weaken, although it will be officially included in the International Monetary Fund’s Special Drawing Rights basket in October next year.

Capital flight is set to continue amid China’s stalling economic growth. Chinese equities appear less attractive as investors anticipate further monetary easing measures from Beijing.

Meanwhile, capital will flow into the US market but at limited scale as the Federal Reserve is expected to take a gradual approach in hiking interest rates.

Hong Kong’s real economy is being hurt by the currency peg. Besides, expectations of a Fed liftoff are triggering a correction in the housing market, a pillar of its economy.

The property market is expected to fall by 5 to 10 percent next year as a result of increased supply.

Indeed, 2016 is set to be a tough year for the Hong Kong and China markets. Only a few of Hong Kong stocks can benefit from improving external demand.

In particular, companies with substantial exposure to the US market are being sought after by fund managers. One example is Cheung Kong, which has been aggressively venturing into overseas markets in recent years.

Exporters and manufacturers that can benefit from falling commodity prices and a weaker yuan are also attractive. Investors can also look for some intermediaries such as Value Partners (00806.HK) which help mainland investors tap into foreign markets for an annual return of 3 to 6 percent. High-dividend Hong Kong plays are also interesting.

Meanwhile, investors have always used P/E ratio as a key metric. However, earnings are unlikely to rebound quickly given the struggling economy.

In such a case, investors should abandon the long-time guideline of value investment, and bet on stocks that have policy support and fancy concepts.

As we’ve seen, Facebook has made little profit so far, and so have some mainland internet plus-related stocks.

Without strong earnings growth, these stocks have been able to generate good returns for fund managers.

In fact, a number of healthcare, new energy vehicle, environmental protection, entertainment and telecom stocks have been chased by fund managers. Investors should watch these plays more closely.

This article appeared in the Hong Kong Economic Journal on Dec. 8.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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