24 October 2016
Hong Kong stocks could hover around 19,800 to 21,000 points even if MSCI rules against the inclusion of A shares in its indices. Photo: HKEJ
Hong Kong stocks could hover around 19,800 to 21,000 points even if MSCI rules against the inclusion of A shares in its indices. Photo: HKEJ

How to trade an uncertain market? Play cheap

Market conditions are just right to move stocks in the range of 1,000 to 2,000 points either way.

Big investors could bet on uncertainty such as when A shares will finally make it to the MSCI index, or when the US might announce another rate hike and what Britain’s Brexit referendum might bring.

Medium and long-term investors have little interest in staying put.

Some professional investors and individual investors have slashed their exposure to 20 or 30 percent of their portfolio.

Also, some long-term funds have trimmed their weighting of Hong Kong shares in their global equity mix.

A large number of derivatives are available on the market, from options, futures, callable bull/bear contracts, ETF or short-selling tools investors can use to play the market at low capital costs.

Some financial heavyweights have been actively selling offshore stocks short ahead of the MSCI decision on A shares.

Several big banks have made concerted efforts to push up the market. A recent market correction could ease any fall in A shares if MSCI decides against their inclusion.

The US Federal Reserve is expected to keep interest rates unchanged.

Meanwhile, the Brexit vote on June 23 will exert big downward pressure on global financial markets.

Britain might decide to remain in the eurozone at the last minute, in which case a massive global ripple effect would be avoided.

If the final outcome is unexpected, it could cause another wave of market turbulence, with the Hang Seng Index likely to test 19,400. 

That said, Hong Kong stocks could hover around 19,800 to 21,000 points even if MSCI rules unfavorably.

The benchmark might break that range unless Brexit occurs. China’s latest economic figures are not encouraging, so Beijing might maintain its pro-growth policy stance.

Nevertheless, the cancellation of a high-speed rail contract between a US company and a Chinese state-owned firm reflects deteriorating Sino-US relations.

And the presidential election in the US is expected to weigh on its bilateral relationship with Hong Kong, leading to some “black swan” events — a period of extreme uncertainty — to financial markets worldwide.

The Hong Kong market bears the brunt of frequent market inflows and outflows as global investors chase assets with cheap money given subdued world economic growth.

But the market has already priced in some of these uncertainties.

On balance, equities and bonds have been disappointing but gold and currencies have outperformed.

With rampant volatility, speculation is the order of the day.

Investors should take advantage of market correction to 19,800 or 20,000 points and buy some risk-on stocks.

For example, they should continue to enjoy good returns from switching to high-dividend stocks like Link REIT (00823.HK) and some utility stocks.

And they could also put some bet on relevant plays in gold and some agricultural commodities.

Export and industrial plays could suffer as some countries tend to protect their own industries amid lackluster global growth.

By contrast, investors should snap up some inexpensive infrastructure stocks on the back of robust demand in the US and China.

This article appeared in the Hong Kong Economic Journal on June 14.

Translation by Julie Zhu

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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