23 October 2016
Stock markets in Hong Kong and China enjoyed a bounce recently after sharp losses earlier in the year. Photo: Xinhua
Stock markets in Hong Kong and China enjoyed a bounce recently after sharp losses earlier in the year. Photo: Xinhua

Hong Kong stocks may trade sideways near term

Hong Kong stocks posted gains recently due to several factors.

Investors took heart from a Wall Street rally, which came amid expectations that the US Federal Reserve might hold off on further rate hikes due to uncertainties surrounding global growth.

Meanwhile in China, where top officials and lawmakers gathered for annual political meetings, there were hopes that Beijing will stabilize the nation’s economy through supportive measures.

The recent bounce in Hong Kong stock market saw old-economy plays outperform, a reflection of the improved sentiment on the Chinese economy.

Also, some bluechips like Tencent Holdings (00700.HK), China Mobile (00941.HK) and CKH Holdings (00001.HK) will announce their earnings soon.

Annual results announcements will guide market sentiment in the near term.

Despite the recent bounce, it is not clear if foreign funds have changed their view on mainland and Hong Kong markets.

The caution is not surprising, given the equities rout early in the year. 

The Hang Seng Index may trade sideways in the short term. As for this week, the index might move in the range of 19,800 and 21,000 points.

Central banks have injected unprecedented liquidity globally over the last eight years. That has led to huge amounts of cheap money moving around the world, targeting different markets at different times.

Oil prices have slumped to a low of US$26 per barrel from a peak of US$120. Slower economic growth and expanding oversupply have posed risk for commodity markets as well as the global financial system.

And rising geopolitical risks have even made things even more complex.

A decade ago, global investors moved money out of developed markets and shifted to emerging markets in light of much faster economic growth there. BRICs nations and Southeast Asian countries used to benefit from the capital flow.

However, things have shifted in the last two years, as China and India both reported that their economic growth rates eased to single digits.

It’s estimated that the gap in economic growth rate of most countries would continue to narrow by 2020. Then, the growth rate of US is expected to pick up to 2.1 percent from 1.9 percent last year. By contrast, China’s growth rate may ease from 6.8 percent in 2015 to 4.8 percent in 2020.

Also, Japan’s economy is expected to grow by 1.3 percent by 2020 from 0.7 percent at present, and Germany may see its growth rate rise to 2.8 percent from 2.1 percent. The growth rate in India will drop from 7.3 percent to 5.7 percent.

In that sense, markets may continue to grapple with low global growth, posing a challenge for investors.

Hong Kong investors were blessed for many years due to the high growth in China. But now it’s time for them to adapt to a low-growth environment.

They need to learn when to collect stocks, and focus on companies with stable earnings in the medium and long-term.

In assessing companies, the ability to maintain stable dividend payouts is critical.

Investors need to learn when to raise exposure to bonds, when to find high-risk growth stocks, and capture the right timing for switching between new-economy and old-economy plays.

I’ve suggested earlier that investors should pay more attention to the new-economy sector and growth stocks.

However, Beijing may postpone some reforms, including the launch of an IPO registration system, as authorities will focus more on stabilizing the economy.

In this case, infrastructure and mainland property stocks will benefit the most in the short term.

China Communications Construction Co. (01800.HK), CRRC Co. (01766.HK) and Zhuzhou CSR Times Electric Co (03898.HK) have all seen a sharp uptick recently.

Property plays like China Overseas Land & Investment (00688.HK), China Vanke Co. (02202.HK) and China Resources Land (01109.HK), as well as some materials stocks like Anhui Conch Cement Co. (00914.HK), China Resources Cement Holdings (01313.HK) and Angang Steel Co. (00347.HK) also got a boost.

In addition, the state oil giants and domestic consumption-related firms, led by automobile and food plays, are big beneficiaries of Beijing’s policy support.

This article appeared in the Hong Kong Economic Journal on March 15.

Translation by Julie Zhu with additional reporting

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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