Hong Kong market has benefited this month from capital inflows as some investors withdrew money from Europe and returned to Asia.
But the outlook for the next few months is hazy as it is uncertain whether the region will continue to attract more money.
Liquidity flows will depend on several factors.
The European Central Bank (ECB) will release the outcome of new stress tests on EU banks this Friday. Global investors will keep a close eye especially on news surrounding Italian banks, as the lenders are believed to be suffering from some structural problems.
Meanwhile, another thing that will have a bearing on capital flows is policy moves by major central banks.
Investors have several questions on their minds. Among them: Will the Bank of England cut interest rates as expected to ease UK recession fears? Will the ECB expand its bond-purchase program? How will Bank of Japan stimulate growth? And will China push ahead reforms and use fiscal policy to stabilize growth?
The G20 finance ministers’ meeting in Chengdu last week has failed to achieve anything new. The meeting just reiterated that various nations will take action to restore growth and confidence through monetary and fiscal policies and structural reforms.
It shows that major central banks have limited policy tools, even as the market has already priced in further monetary easing.
Japan’s central bank chief has ruled out the idea of using “helicopter money” — or directly underwriting the budget deficit — to combat an economic slowdown.
Elsewhere, if the US Federal Reserve gives any hints this week about a potential rate hike, it could weigh on the Hong Kong market.
The Hong Kong market’s direction right now depends mainly on capital flows. Corporate earnings are unlikely to cause much excitement given the subdued growth in China and a weak global environment.
If central banks launch further monetary easing and China steps up efforts to shore up its growth, it could provide a catalyst for the Hong Kong market.
If that doesn’t happen, the Hang Seng Index may fail to break the 20,000 to 22,500 points range.
The index should move past the 23,433 points mark in order to set the ground for strong upward trajectory.
As the market’s recent gains stemmed from only a handful of stocks, investors may be better off with short-term speculation, rather than long-term investments.
Many listed companies have issued first-half profit alerts or warnings over the last month.
In the case of companies that issued earnings warnings, investors should wait for comments from senior management before making any decisions.
Meanwhile, companies that have issued positive profit alerts are likely to outperform.
Among 60 companies that have issued profit alerts, many have benefited from supply-side reform, mainly in raw materials sector.
Shandong Xinhua Pharmaceutical Co. (00719.HK) flagged more than 60 percent growth in interim profit, with the company expected to benefit from China’s 13th five-year plan.
Elsewhere, King Force Group Holdings (08315.HK) has rosy prospects in mobile gaming and security services.
Huaneng Renewables Corp (00958.HK) said its first-half net profit will be up over 50 percent due to reduced finance costs and newly-installed capacity.
China Aircraft Leasing Group Holdings (01848.HK), meanwhile, said its profit will double due to expanded scale of operations.
Da Ming International Holdings (01090.HK) swung back to profit as stainless steel prices recovered. Among other firms, Automated Systems Holdings (00771.HK) saw significant profit growth due to more orders and lower operating costs.
Texhong Textile Group (02678.HK) estimated a 35 percent jump in its profit as cotton price bottomed out, while CITIC Resources Holdings (01205.HK) also gave a positive forecast.
Among other stocks that investors should consider accumulating are Hi Sun Technology China (00818.HK) and Genscript Biotech (01548.HK).
This article appeared in the Hong Kong Economic Journal on July 26.
Translation by Julie Zhu
[Chinese version 中文版]
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