Investors should use any stock market rebound in the short term to cut losses and reduce exposure.
They should stay on the sidelines for the first quarter of the year and wait for the right timing to go “all in”.
China’s economic growth has been moderating, and a new economy is slowly emerging.
However, long-standing excessive capacity continues to be a drag on the overall economy.
There will be more debt defaults in future as a result of the economic restructuring.
Currency devaluation and capital outflows are part of the country’s painful journey of economic reform.
They do offer excuses for short sellers.
Most emerging countries, especially those dependent on commodities, are suffering from sluggish global growth and a deleveraging process.
Unfortunately, Hong Kong is a gateway for foreign capital and mainland investors.
The city is also a testing ground for internationalizing the renminbi.
So Hong Kong will bear the brunt of any market turmoil.
Some foreign investors pulled money out of mainland China in the last quarter of 2015 and parked some capital in Hong Kong.
The mounting expectation for a weaker renminbi has now prompted them to withdraw money from Hong Kong, which has driven up the Hong Kong Inter-bank Offered Rate.
We might see another financial crisis similar to the one in 1997.
However, Hong Kong and the mainland should be able to withstand the shock this time.
Global crude oil prices have plunged to below US$30 per barrel from a peak of US$130.
That has rippled into various industries and had an impact on global capital flows.
The strong US dollar has lured in capital worldwide, and US treasuries have boomed thanks to safe-haven demand.
However, the commodity market is free-falling.
The Hang Seng Index tumbled early last week below the trough of 20,368 points on Sept. 29 last year.
I suggest investors should reduce exposure to equities so as to protect their buying power given the continued downside risk.
We are in the middle of a bear market cycle, and our most optimistic expectation is that the market should stabilize in the range of 18,000-22,000 points.
If not, investors should hold back and just wait.
Several major banks have given bearish views and expect the Hong Kong dollar to weaken further against the US dollar.
Investors could accumulate some plays favored by fund managers, who are grappling with redemption pressures at the moment.
These stocks are likely to shine again when the fund managers come back, and investors can sell or buy these stocks easily during market ups and downs because of their good liquidity.
Also, investors can bet on stocks that pay stable dividends.
Meanwhile, defensive stocks are also attractive, as they are less sensitive to economic cycles.
I’ve noted before several local telecom operators worth buying.
Also, investors should take advantage of this market correction to adjust their portfolio, as China is shifting to a new-economy-driven model.
Investors should give more weight to new-economy stocks.
A-share ETFs are likely to outperform the Hang Seng Index and Hang Seng China Enterprise Index.
And investors can make some bets when the Shanghai Composite Index tumbles below 3,000 points.
Blue-chip stocks included in Shanghai-Hong Kong Stock Connect are a good bet for medium-term investment.
Investors should watch closely the earnings to be announced soon.
They will provide a good indication of the impact of the slowdown in China’s economic growth on specific companies, in particular on their debt repayments and dividend payments, and how the depreciation of the renminbi has affected their bottom lines.
This article appeared in the Hong Kong Economic Journal on Jan. 19.
Translation by Julie Zhu
[Chinese version 中文版]
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