23 February 2019
Investors are advised to cut their equity exposure to 20 or 30 percent of their portfolio this month. Photo: Reuters
Investors are advised to cut their equity exposure to 20 or 30 percent of their portfolio this month. Photo: Reuters

Investors to encounter huge volatility this year

The Shanghai Composite Index plunged 6.86 percent on the first trading day of the new year, triggering a new circuit breaker mechanism that halted trading for the rest of the day.

The slump also triggered a trading halt in A shares in the Hong Kong market.

Monday’s trading should serve as a warning to investors that they should brace for more volatility in 2016.

Chinese authorities are trying to push forward various reforms. These measures are steps in the right direction but their impact many be less than encouraging amid a gloomy global economic environment.

Investors are advised to stay on the sidelines this month as Beijing prepares to unveil new policies to stimulate economic growth.

It seems the market may regain its momentum in the second half of this year, after going through heightened volatility in the first half.

That being the case, investors should reduce their equity exposure to 20 or 30 percent of their portfolio this month, compared with 40 percent in December, amid uncertainties in the market.

China’s A shares face huge selling pressure as restrictions on major stakeholders on the sale of about 1.1 trillion yuan (US$168.7 billion) worth of shares are scheduled to be lifted on Jan. 8.

Also, the upcoming “two sessions” of the Chinese People’s Political Consultative Conference and the National People’s Congress as well as the depreciation risk of the renminbi are also expected to increase market volatility in the short and medium term.

Some Federal Reserve officials have hinted that rate hikes would speed up this year, and that would weigh on equity markets in the United States and Hong Kong.

By contrast, markets in Europe and Japan are expected to outperform thanks to monetary easing measures.

Meanwhile, the Shanghai market is likely to swing in the wide range of 2,800 to 4,300 points this year.

In Hong Kong, the market is dragged by the strong US dollar and rate hikes on the one hand and economic slowdown on the other. The Hang Seng Index may hover below 20,000 points for a long period without any upward catalyst at the moment.

The first few days of January usually reflect the investment direction of fund managers in the new year.

However, as many as 1,401 stocks declined on Monday, and 59 of them touched new lows. The futures index closed with a discount of 200 points and trading volume reached HK$73.8 billion. That reflected the bearish sentiment of foreign investors after the long holiday break.

I’ve noted before that investors should collect some medium-term investment targets in the new energy, environmental protection, innovation, internet, pharmaceutical and mainland insurance sectors. They should also put some bets on oversold oil and consumer plays after a market correction.

The wind direction always changes quickly in the investment world. Investors with a medium-term horizon should take advantage of the sell-off and act in the opposite direction of the crowd. They could put a small bet on oil stocks that plunged last year.

The crude oil price has tumbled to US$30 per barrel, far off its peak of nearly US$135. Continued geopolitical risks in the Middle East, especially the growing tensions between Saudi Arabia and Iran, may drive the oil price back to US$40 to US$50 this year.

In this case, investors should look for different tools to capture the rebound. China’s three oil giants have little correlation with the oil price. Instead, investors should watch closely the movement of airline stocks, which are sensitive to an oil price rally.

This article appeared in the Hong Kong Economic Journal on Jan. 5.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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