26 October 2016
Chinese authorities will try to ensure market stability as they prepare for key political meetings next month. Photo: Xinhua
Chinese authorities will try to ensure market stability as they prepare for key political meetings next month. Photo: Xinhua

Investors should seek short-term bets ahead of China meetings

As markets show signs of stabilizing, investors should bet on some laggard and policy-driven stocks for short-term trading. 

Some sectors and companies have enjoyed considerable gains, but overall markets in Hong Kong and China still lack fundamental support and sufficient turnover. The rebound might be short-lived, and investors should constantly switch their bets to make decent profits.

Oil price crash is closely linked with gloomy equity markets all across the world. But now Russia, Saudi Arabia and some other oil producers have agreed to freeze their output.

Though it remains unclear how the move will work, it has helped stabilize benchmark crude prices at around US$30 per barrel.

The Fed liftoff has pushed up US dollar, while European and Japanese central banks have adopted negative interest rates.

In addition, expectation for yuan depreciation has further unnerved investors.

It’s unlikely that the Fed will raise interest rates in March given the tepid global and US economic data.

Meanwhile, recent remarks from Chinese central bank governor Zhou Xiaochuan have helped stabilize the renminbi.

The Chinese currency is likely to hold up well ahead of the annual “Two Sessions” in Beijing in March. Stock markets in China and Hong Kong have benefited in the past few days from calmer capital flow situation worldwide.

Beijing has unveiled various pro-growth measures in recent months, including looser fiscal policy, tax subsidy for housing and other sectors. Authorities are keen to ease market jitters before the NPC and CPPCC meetings next month.

In other news, Xiao Gang has been replaced by Liu Shiyu, the former chairman of Agricultural Bank of China, as the chairman of the China Securities Regulatory Commission. It’s believed that Xiao was taken to task due to the fiasco over a “circuit breaker” system on the stock exchanges.

Liu is expected to be more conservative after taking the top job at the securities regulator, heeding Beijing’s stability call. Hence, there could be slowdown in reforms pace in the markets.

The recent rebound in Hong Kong market mainly stemmed from a technical uptick. A number of oversold mainland insurance, banking and policy-driven stocks led the market rally as some big investors returned to the market.

Beijing has sought various supportive measures ahead of the NPC and CPPCC meetings, including tax cuts for those who plan to change to bigger flats. However, the measures may fail to provide upward momentum for long and the markets may reverse the recent bounce.

We should also bear in mind that the earnings season is coming. A slowing economy, currency slide, weak commodity prices and industrial overcapacity are set to affect profit margins of listed Chinese firms as well as create more bad loans for the financial sector.

In fact, relevant stocks have already priced in these factors in advance.

Investors could use the earnings announcements to gauge the sector outlook and individual company prospects. And they should continue to sell old-economy stocks and switch to attractive new-economy plays.

Currently, second and third-tier stocks are more attractive than bluechip SOE heavyweights. Investors may engage in short-term speculation while keeping their equity exposure at 20 to 30 percent of the portfolios.

This article appeared in the Hong Kong Economic Journal on Feb. 23.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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