By mid-February, the CSI 300 had fallen more than 18 percent and the Hang Seng Index was down 13 percent.
At least half of the losses can be attributed to investor overreaction.
Volatility is unavoidable but there’s still an 80 percent chance that stocks in Hong Kong and China will rise 10 percent in the next six to 12 months.
There are four major indicators.
Market consensus is that these stocks are undervalued. The Hang Seng Index and MSCI China Index once fell below financial crisis levels.
The low valuation is not compatible with Chinese companies’ improving fundamentals.
Most Chinese companies have healthy finances and leverage has eased. However, the lukewarm earnings outlook and a sluggish macro environment have made investors more wary.
US dollar trend
More people expect the US Federal Reserve to slow its pace of interest rate rises but the risk appetite of global investors may increase, relieving pressure on assets in emerging markets.
As funds flow back to emerging markets, including China, the Hong Kong stock market will get a boost.
Central government policy
Government policy plays a key role in controlling and stabilizing capital flow.
We expect the government to continue its reform agenda for a healthier capital market and a more prudent oversight regime.
Cross-border capital flow
The Hong Kong-Shenzhen stock link is likely to be launched in the first half.
South-bound capital will ease outflows from Hong Kong.
Understanding these four indicators can help investors identify key turning points.
Investors should use a bottom-up strategy to pick quality stocks.
We prefer medium and large caps because they will be among the first to benefit from a rebound in the stock market.
This article appeared in the Hong Kong Economic Journal on March 2.
Translation by Myssie You
– Contact us at [email protected]