20 October 2018
Among defensive stocks, local telecom operators such as SmarTone are very attractive. Photo: HKEJ
Among defensive stocks, local telecom operators such as SmarTone are very attractive. Photo: HKEJ

Investors should reshuffle their portfolio in first half

The Hong Kong and mainland equity markets have seen little excitement before the Lunar New Year holidays.

Investors should adopt a strategy that is both defensive and offensive to outperform the benchmark in the Year of the Monkey.

At the moment, however, they should maintain an 80 percent cash level.

As I’ve noted before, they should view the strength of the recent rebound as indicator of future market direction.

If the Hang Seng Index fails to break 20,400 points, investors should take profit during each rebound or even short the market.

If the benchmark hits 20,978 or even 21,555 points, that would be a sign of improving market sentiment in the medium term.

Capital flow will continue to hold sway in equity market performance all over the world in the short term.

Both mainland and Hong Kong markets are suffering from capital outflow. Long-term pension funds, mutual funds and hedge funds are struggling under redemption pressure in the region.

The latest Fed minutes failed to remove uncertainty over a rate hike in March. Meanwhile, the Bank of Japan pushed interest rates below zero. As a result, the Japanese yen plunged below 121 against the US dollar.

That is set to weigh on capital flow in mainland China and Hong Kong, apart from raising expectation for a yuan depreciation.

It’s difficult to predict the scope or sustainability of currency depreciation, since it’s usually the best excuse for capital flight resulting from the lack of confidence.

In fact, the weaker yuan has also restricted Beijing’s capability to further relax its monetary policy.

In this case, investors should switch their portfolio from old-economy to new-economy plays. They should reduce holdings of traditional old-economy shares and collect new-economy shares during each market correction.

If they intend to place bets on leaders of new-economy sectors, they should pick those with good fundamentals and liquidity. Investors should complete the reshuffle of their portfolios within the first half.

Meanwhile, they should add both defensive stocks, which are more resilient during economic downturns, as well as stocks that can pay high dividends and maintain stable operation.

They should also collect some high-growth stocks, which are in line with the new economy concept and may even have extremely high P/E ratios at the moment.

Investors should place more weight on high-growth stocks if the market sentiment improves, or focus more on defensive stocks amid poor market conditions.

As for defensive stocks, local telecom operators are very attractive. These include SmarTone Telecommunications Holdings Ltd. (00315.HK), HKT Trust & HKT Ltd. (06823.HK), and PCCW Ltd. (00008.HK).

The same holds true for local real estate investment trusts (REITs), including Link REIT (00823.HK), Sunlight Real Estate Investment Trust (00435.HK), and Prosperity REIT (00008.HK).

Several mainland highway plays such as Anhui Expressway (00995.HK) and Yuexiu Transport Infrastructure (01052.HK) are also attractive.

Investors could also bet on some public utilities stocks, including CLP Holdings (00002.HK), Hong Kong & China Gas (00003.HK), HK Electric Investments & HK Electric Investments (02638.HK), China Resources Gas Group (01193.HK) and Guangdong Investment (00270.HK). They could collect these plays at low price levels.

There are very few growth new-economy stocks in Hong Kong. They include internet plays Tencent Holdings (00700.HK), Semiconductor Manufacturing International (00981.HK), and Lenovo Group (00992.HK).

As an alternative, investors could bet on potential acquisition targets like Crocodile Garments (00122.HK), or those that could see asset injection like CCT Land Holdings (00261.HK).

Meanwhile, investors could also consider some military stocks like CSSC Offshore and Marine Engineering Group (00317.HK), AviChina Industry & Technology (02357.HK), and some new energy stocks like Huaneng Renewables Corp. (00958.HK), China Power New Energy Development (00735.HK), China Longyuan Power Group (00916.HK) and Xinjiang Goldwind Science & Technology (02208.HK).

This article appeared in the Hong Kong Economic Journal on Feb. 2.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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