Brexit vote has triggered huge volatility in global financial markets, giving anxious moments to investors.
While trading will remain choppy in the near term, the chaos stemming from the UK referendum will however present an opportunity for investors to increase their exposure to Hong Kong and mainland China equities.
It is worth bearing in mind that over the last decade, the Hong Kong market posted rallies in July for nine years out of ten.
Some sectors in the Hong Kong market now look attractive in terms of valuations.
As for the mainland, stocks there could also see some renewed interest amid favorable capital flows.
In the short term, various central banks around the world, especially the European Central Bank, might take steps to stabilize the markets.
However, the heightened political and economic uncertainty in Europe might prompt investors to withdraw money from the region in the next two to three years.
Scotland and Northern Ireland, where a majority of voters voted to remain in the EU, might launch referendums on breaking away from the United Kingdom.
The Brexit vote, meanwhile, could prompt other European nations to make their own moves, which will add to fears of the collapse of the European Union.
Currently, investors are expecting major central banks to pump money into their economies to stimulate growth.
China might further reduce the bank reserve requirement ratio to unlock more funds into the system. Meanwhile, the odds of a US rate hike in July have diminished.
As all these moves will be supportive factors for the equity markets, investors might reconsider China, which is still maintaining a growth rate of 6.7 percent despite a slowdown.
The possibility of an EU collapse could be an opportunity for China. Fights among EU members would tip the balance in favor of the US and Asia, and China has more to gain than lose.
However, Hong Kong, which is highly exposed to the global market, may continue to struggle with increasing market volatility.
Investors have to adapt to the fact that they should frequently switch bets in order to make money amid subdued global economic growth.
They should collect some risk-on stocks during each deep correction and take profit if the market rallies 1,000 or 2,000 points. After taking profit, investors should switch to risk-off plays like high-dividend stocks.
This strategy will continue to work in the third quarter of this year. Investors should frequently switch between risk-on and risk-off plays, and focus on companies that are exposed more to the US and China markets.
Investors can buy gold and some gold mining stocks, among other assets. Also, companies that could benefit from the upcoming Shenzhen-Hong Kong Stock Connect are also good bets.
Some dual-listed plays that have large price difference between their mainland and Hong Kong shares deserve a closer look.
Northeast Electric Development Co. (00042.HK), Shandong Molong Petroleum Machinery Co. (00568.HK), Zhejiang Shibao Co. (01057.HK), Xinjiang Goldwind Science & Technology Co. (02208.HK) and Shandong Xinhua Pharmaceutical Co. (00719.HK) are some of the stocks worth taking a bet.
Brokerage firms are also attractive as they could gain more business as funds seek to diversify their risks.
In addition, investors should keep a close eye on some A-share ETFs like CSOP FTSE China A50 ETF (02822.HK), iShares FTSE A50 China Index ETF (02823.HK) and China AMC CSI 300 Index ETF (03188.HK).
Elsewhere, property stocks also are good bets as the US will put off interest-rate hikes and global central banks will pump more liquidity into the markets.
This article appeared in the Hong Kong Economic Journal on June 28.
Translation by Julie Zhu
[Chinese version 中文版]
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