23 October 2016
Investors may look for companies that will benefit from China's supply-side reform and efforts to eliminate excess capacity. Photo: HKEJ
Investors may look for companies that will benefit from China's supply-side reform and efforts to eliminate excess capacity. Photo: HKEJ

Investors should switch bets as interim results come in

The market expects further monetary easing from major central banks.

In a surprise move, the Bank of England has kept interest rates on hold. However, it’s widely expected the central bank may take action in August.

Japan’s Prime Minister Shinzo Abe is considering “helicopter money”, while the European Union may expand its debt purchase program.

Political tension in the South China Sea has eased after the Philippines agreed to launch bilateral talks with China. The failed military coup in Turkey has also reduced the geopolitical risks triggered by “Black Swan” events.

Investors should be wary that major central banks may delay further monetary easing measures since they have been left with limited ammunition.

The Bank of England may be forced to cut interest rates unless they see a clear sign of capital outflow.

On the other hand, the Japanese government won’t risk bankruptcy if they adopt “helicopter money” hastily.

The EU may also hold back its bailout of the banking system after the results of stress tests on Italian banks are released.

As a result, the market is likely to remain stable as no news is good news.

Some investors may chase laggard stocks as well as REITs and property stocks that benefit from a low interest rate environment.

The Hang Seng Index is likely to edge up to 20,000 to 22,500 if the launch of the Shenzhen-Hong Kong Stock Connect is announced soon.

I suggest investors take profit in the next two weeks as the market may level off soon.

Historical data shows that the Hong Kong market has dropped in August for eight years out of last decade, with an average decline of 2.99 percent.

I’ve noted before that it may resume its upward trajectory if it rebounds to 23,433 points. Investors should not get too excited in light of the recent market rally.

Interim corporate earnings may not offer much excitement amid subdued economic growth worldwide.

Listed companies have so far issued 52 profit alerts against 169 profit warnings for their first-half results.

However, investors may find some good bets among companies that will benefit from China’s supply-side reform and efforts to eliminate excess capacity.

Maanshan Iron & Steel (00323.HK) and China Coal Energy (01898.HK) have swung back to profit. Xinyi Solar Holdings (00968.HK) and China Technology Solar Power Holdings (08111.HK) have reported a more than 50 percent jump in their net profit.

Sinopec Shanghai Petrochemical Co. (00338.HK) expects its first-half profit to soar by 70 to 90 percent. China Aircraft Leasing Group Holdings (01848.HK) saw its interim net profit double.

Those investors who intend to adjust their portfolios could reduce stocks in upstream sectors, particularly resources and air freight stocks.

Meanwhile, a number of internet plays like Tencent Holdings (00700.HK) have maintained a strong growth momentum.

Healthcare and auto stocks are also attractive, while Macau gaming stocks have already seen substantial rebound in recent weeks.

Investors could also collect some stocks related to the Shenzhen-Hong Kong Stock Connect in the medium term.

This article appeared in the Hong Kong Economic Journal on July 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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