21 April 2019
The Hang Seng Index could slip further if it breaks a crucial support level at 19,400, says a market watcher. Photo: HKEJ
The Hang Seng Index could slip further if it breaks a crucial support level at 19,400, says a market watcher. Photo: HKEJ

Why investors should remain cautious in the near term

A bearish sentiment appears to be gaining ground in Hong Kong. Fund managers are increasingly seeking risk-off investment tools, switching from equities to bonds, a trend that has become evident over the last couple of years.

The Hang Seng Index found a floor in the 19,500 to 20,300 points range last week. A key thing to watch now is whether the benchmark will stabilize at the key support level of around 19,400.

If the index slips below that level, it could test the low of 18,600.

Optimists believe the market will hold up well ahead of the upcoming US Federal Reserve meeting. The Fed’s policymaking committee will meet mid-June to decide on interest rates.

Investors are likely to get more clues next week regarding the shape of things to come.

Reduced trading volumes in Hong Kong suggest that foreign investors have almost completed their selling activities.

Turnover overall dropped to less than HK$50 billion on Monday. The market is likely to be in a tight range until the middle of next month.

Many top central banks in the world are currently focusing on the economic and political situation in their home countries. The recent G7 summit of finance ministers showed that the US and Japan have open disagreement about the value of the Japanese yen.

Regarding the pace and degree of Fed rate hikes, optimists believe the central bank is just making some noises in order to lure more capital into the US. The observers are of the view that there will be just one rate hike this year.

Investors will watch closely a speech to be given by Fed chair Janet Yellen on May 27.

The uncertainty surrounding US rates has cast a shadow on the financial world, be it equities, commodities or foreign-exchange markets.

Meanwhile, there are also worries about a possible hard-landing in China and some other emerging economies, apart from concerns about capital outflow and credit defaults.

All these factors would lead to significant volatility among different asset classes.

The global economy is grappling with subdued growth, and is also facing the rising risk of deflation and recession. The impact of monetary easing stimulus has been fading.

Without support from the real economy, investors will find that they can no longer make quick profits.

Many hedge funds in China and Hong Kong have shifted to a multi-asset class strategy amid this environment.

As players take various bets and engage in some short-selling, market volatility could rise, and remain that way, in the near future.

A US rate move is the focus of markets now, but authorities could decide to hold off on their tightening before the so-called Brexit referendum in the UK.

Even if the Fed decides to act, it will only push the rates up by 25 basis points at the most.

That said, any rate hike could create a “domino effect”.

Given this situation, investors would do well to take a cautious approach and buy US Treasuries and corporate bonds from bluechip names.

I would advise investors to reduce their equities exposure to 20 percent of their overall portfolio.

If you are a conservative player in Hong Kong, you should use stop-losses if the local benchmark falls below the 19,400 points mark.

Stocks such as Tencent Holdings (00700.HK), Sunny Optical Technology Group (02382.HK), AAC Technologies Holdings (02018.HK), AIA Group (01299.HK), Kingsoft Corp. (03888.HK), China Railway Construction (01186.HK) are good candidates for a balanced investment portfolio, apart from some Macau gaming plays and healthcare and telecom counters. 

This article appeared in the Hong Kong Economic Journal on May 24.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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