19 November 2018
HKEx has the potential to compete with the world's biggest exchanges as the flagship exchange for Hong Kong and mainland China. Photo: Bloomberg
HKEx has the potential to compete with the world's biggest exchanges as the flagship exchange for Hong Kong and mainland China. Photo: Bloomberg

Stay cautious on the market and preserve capital

Hong Kong and other markets have been fairly volatile since the beginning of the year.

The US Federal Reserve’s decision to hold interest rates unchanged has reversed the trends in gold, equities and currencies.

Hong Kong has always been exposed to frequent capital flows across the world.

I prefer to stay cautious and preserve capital.

And I suggested in January and February that investors reduce stocks in their portfolios as the Hang Seng Index slipped below 20,400 points.

They should have increased their stock holdings at the trough of 18,000-18,500.

The Hong Kong market has been hovering around the 100-day moving average of 20,800 points for the last two weeks.

Investors should be very careful and hold back to make sure the uptrend is well established.

The Fed made very “dovish” remarks last week, and that has eased market concerns about a rate hike in the first half of the second quarter.

As a result, a weakening US dollar has encouraged risk-on sentiment.

Bonds, stocks, currencies and commodities like gold have bounced strongly.

Interestingly, the US market has already recouped all its losses so far this year.

Some money has returned to emerging markets.

Taiwan, South Korea and Malaysia have reported gains.

By contrast, China’s A shares and stocks in Hong Kong of blue-chip state-owned enterprises remain under pressure.

The recent recovery of the Hong Kong market is just a temporary blip following sharp falls earlier this year.

Short-term investors should strictly implement stop-losses and switch bets frequently.

Those who have a medium-term horizon should continue to stay on the sidelines.

Meanwhile, the recent uptick in China’s A shares mainly stemmed from a relaxation of rules on financing.

The government appears to be guiding money from the red-hot property market in first-tier cities to the stock market again.

However, the authorities might want to prevent A shares from an extravagant rally this year and allow the state market rescue fund to exit at proper time.

A shares won’t be the growth engine for the Hong Kong market.

Hong Kong Exchanges and Clearing Ltd. (00388.HK) rallied rapidly recently.

But it remains unclear whether the rally was driven by capital or policy.

Several high-level Chinese officials, including Premier Li Keqiang, have given assurances that Shenzhen-Hong Kong Stock Connect will come on stream this year.

Nevertheless, Beijing is treating stemming capital outflows as a top priority.

The stock link is unlikely to be launched shortly.

However, I would rather focus on the growth prospects for the long run.

London Stock Exchange Group merged with Deutsche Boerse recently, creating one of the world’s largest exchanges, worth over US$30 billion.

The deal puts the new exchange into the top three, along with Intercontinental Exchange Inc. and CME Group.

And HKEx has the potential to compete with these powerful exchanges as the flagship exchange for Hong Kong and mainland China.

That is critical if China is to have a bigger say in the global financial world and beef up its global financial power.

In fact, the price-earnings ratio of HKEx is similar to that of the London and Frankfurt exchanges.

Investors could accumulate HKEx shares for a medium-term investment when the price comes back to HK$170.

GF Securities Co. Ltd. (01776.HK) posted a jump of 163 percent in net profit last year to 13.2 billion yuan (US$2 billion).

Guotai Junan International Holdings Ltd. (01788.HK) reported a 26.7 percent rise in net profit to 1.01 billion yuan.

Investors could put short-term bets on these plays.

Also, some internet and new technology stocks have suffered considerable falls recently as investors shift to the real economy.

Investors could take the opportunity to accumulate stocks like Tencent Holdings Ltd. (00700.HK), Kingsoft Corp. Ltd. (03888.HK) and Sunny Optical Technology (Group) Co. Ltd. (02382.HK).

This article appeared in the Hong Kong Economic Journal on March 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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