The Hang Seng Index is down 9 percent, or more than 2,000 points, in the first six trading days of the year while the China Enterprise Index is off 11.8 percent.
That means most investors have suffered losses unless they are good at short selling.
The benchmark is at its worst level in two and a half years and is likely to trade in the 18,000 to 20,400 range.
Nevertheless, investors should not jump in too quickly. Downside risks remain.
The market might stage a technical rebound, albeit briefly in the absence of a catalyst from economic fundamentals.
Capital flow is also weighing on the market.
January is not a good time to enter the market. However, investors could take advantage of a potential rebound from new stimulus ahead of the Lunar New Year holiday.
China’s “circuit breaker” mechanism which was introduced last week to stem a precipitous fall in share prices, has been blamed for causing turmoil in global markets.
The mechanism triggered a two-day trading suspension. But as much as 6 trillion yuan (US$152.2 billion) in market capitalization has been wiped out during the next eight days.
The market has been overwhelmed by policy uncertainty. In addition, the yuan is showing signs of further weakness.
Beijing abandoned the circuit breaker less than a week after its debut, calling the credibility of the nation’s top securities regulator into question.
Circuit breakers have worked effectively in stabilizing developed markets.
However, it’s doubtful the mechanism will work in China given that more than 80 percent of market participants are retail investors.
Investors are adopting a wait-and-see attitude in the wake of Beijing’s market rescue measures last year.
The Chinese yuan flirted with 0.67 against the US dollar, prompting the central bank to step up intervention to prevent capital outflows.
Traditionally, currency devaluation supports equities and other asset classes because it improves export competitiveness and boosts expectations for property appreciation.
However, China’s A shares and housing prices in lower-tier cities have gone in the opposite direction.
A wobbly A-share market is set to drag on Chinese stocks in Hong Kong.
Meanwhile, foreign investors are using the Hong Kong market as some kind of ATM to wind up positions in China.
This will result in a huge shock in the short term.
Investors should look for leading industry players.
The more conservative ones could collect stocks with earnings and high-dividend support during the market sell-off.
Those looking for stable dividend payouts could consider a number of stocks such as Sino Biopharmaceutical Ltd. (01177.HK), Tradelink Electronic Commerce Ltd (00536.HK), PCCW (00008.HK), Power Assets Holdings (00006.HK) and China Mobile Ltd. (00941.HK).
Other stocks such as Link REIT (00823.HK) and Cheung Kong Infrastructure Holdings (01038.HK) are also attractive.
Investors could find growth stocks in Internet Plus plays, pharmaceutical, sportswear and new energy sectors, as well as a number of blue-chip counters favored by fund managers including AIA Group (01299.HK), MTR Corp. (00066.HK), HSBC Holdings (00005.HK), CK Hutchison Holdings (00001.HK) and HKT Trust & HKT (06823.HK).
These stocks might go through a correction in the short term which would present a good buying opportunity for medium-term investors.
This article appeared in the Hong Kong Economic Journal on Jan. 12.
Translation by Julie Zhu
[Chinese version 中文版]
– Contact us at [email protected]