25 October 2016
Hong Kong stocks could recover further from recent lows, but don't expect an unbridled rally. Photo: HKEJ
Hong Kong stocks could recover further from recent lows, but don't expect an unbridled rally. Photo: HKEJ

After the bounce, what’s next for the Hong Kong market?

Hong Kong’s benchmark index managed to break above its 100-day moving average following some encouraging economic data from China last week.

With most fund managers still holding huge amounts of cash, markets in Hong Kong as well as mainland China could recover further in the next one to two months.

However, the upside will be capped as concerns linger about slow corporate earnings growth and rising debt levels of firms in China.

Investors should be selective in choosing individual stocks and sectors.

The Hang Seng Index bounced back to 21,511 points intraday on April 14 as investors rushed to build positions after the benchmark broke past the 100-day moving average.

The index now has a chance to rise to the 22,000 level.

Nevertheless, it’s still too early to conclude that the trend has been reversed for the medium term. The index has gained 1,500 points in recent weeks, setting the stage for a potential technical correction. 

A meeting between OPEC and Russia has failed to produce an agreement on curbing oil output. As a result, crude oil prices fell back.

In fact, Iran is trying to revive its output as fast as possible to pre-sanctions levels.

Improving economic growth in US and China could help the oil market achieve a balance, helping crude stabilize in the range of US$35 to US$45.

That will accommodate global economic growth, as well as help ward off financial difficulties for institutions and emerging nations that depend on oil revenue.

The failed OPEC meeting offers an excuse for short-term sell-off in the market, but it won’t trigger any market crash.

Investors could take the opportunity to collect shares of China’s three big oil giants.

Market participants have mixed views on China’s recent economic data.

China has managed to achieve 6.7 percent GDP growth in the first quarter compared to the same period last year. Beijing has shown strong resolve to stabilize growth, as evidenced from bank lending and infrastructure investment data.

Optimists believe Beijing has more policy tools to help the growth recovery, while pessimists say the unprecedented stimulus could lead to further and more profound issues in the future.

Investors should take a more neutral view, while recognizing that the market has become more complex due to central bank interventions.

To beat the market, investors need to think out of the box.

I’ve suggested earlier that investors should use market corrections to collect defensive plays like utilities and high-dividend stocks.

HKT Trust & HKT (06823.HK), PCCW (00008.HK), Cheung Kong Infrastructure Holdings (01038.HK), China Mobile (00941.HK), Sunny Optical Technology Group (02382.HK) and Tencent Holdings (00700.HK) are some stocks worth accumulating.

Factors such as the upcoming Shenzhen-Hong Kong Stock Connect program, likely inclusion of A-shares into the MSCI, debt-to-equity swaps, SOE consolidation and excess industrial capacity elimination in China will make certain sectors outperform at different times.

Hence, investors should constantly switch bets among different stocks.

This article appeared in the Hong Kong Economic Journal on April 19.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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