23 October 2016
The volume of trading in June and July, when fund managers go on summer holidays, tends to diminish, potentially leading to greater volatility in the stock markets. Photo: Reuters
The volume of trading in June and July, when fund managers go on summer holidays, tends to diminish, potentially leading to greater volatility in the stock markets. Photo: Reuters

Beware of growing volatility in June

The Hong Kong stock market has entered into an era of wide swings this year, and investors should move against the crowds from time to time.

Aggressive investors could use derivatives to increase their profit.

And conservative investors should maintain stock exposure at 30 percent of their portfolio.

Every time the Hang Seng Index posts a rally or drop of over 2,000 or 3,000 points, investors should jump on the other side.

Last week, the market was extremely quiet, and the short-selling ratio soared to an 18-year high of 18.4 percent.

Meanwhile, market turnover fell to a trough of HK$40 billion (US$5.15 billion) for two straight sessions.

As a result, the Hang Seng Index bounced back quickly Monday and registered a rally of over 1,000 points from the lowest point last week.

It seems my strategy has worked quite well.

I’ve suggested that investors accumulate some risk-on stocks at around 19,500 points on the HSI, such as Tencent Holdings Ltd. (00700.HK), Sunny Optical Technology (Group) Co. Ltd. (02382.HK) and China Railway Construction Corp. Ltd. (01186.HK).

The Hang Seng Index has already posted a fairly sound rally and might face some resistance at 20,867 points.

The market is likely to hover around 20,000 points for some time, and investors could accumulate some laggard stocks or plays relevant to Shanghai-Hong Kong Stock Connect or the upcoming Shenzhen-Hong Kong Stock Connect.

The market will be focusing in June and July on themes such as the start of Shenzhen-Hong Kong Stock Connect and the inclusion of A shares in the MSCI Emerging Markets Index.

Any confirmation would become a trigger for investors to take profit or drive up relevant stocks to pick up.

Also, whether Beijing will impose further cuts in interest rates or reserve requirement ratios will become an excuse for big investors to lead market moves.

In fact, June and July are a traditionally dull season for the investment world, as fund managers are off on summer holidays.

As a result, lack of trading will make the market even more volatile in the coming months.

The range-bound pattern will not be broken unless there is a “black swan” event.

For example, if the US Federal Reserve announces a rate hike of over 1 percent or imposes hikes more than twice in the second half of this year.

That would catch investors off guard, since they have already absorbed the forthcoming rate increase in July.

If major central banks continue to promote stability and China focuses on economic restructuring, global capital flows are unlikely to reverse.

Certainly, Hong Kong and mainland markets appear to be bearish amid the economic downturn.

However, the performance of the overall market and specific stocks has had a less-than-expected correlation with the broad economy or company earnings.

Also, the Hong Kong stock exchange intends to tighten up approvals for initial public offerings and crack down on rampant speculation on the stocks of shell companies, which can be sold for a future back-door listing.

Investors could find some hidden gems in listed companies with market caps below HK$500 billion or HK$600 billion.

This article appeared in the Hong Kong Economic Journal.

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal

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