Hong Kong stocks picked up more than 2,000 points last month and are up more than 1 percent this year.
Is another bull market coming? Should investors take profit or increase their investment first?
Daily market turnover rose above HK$70 billion (US$9 billion) on Tuesday but many investors doubt the rally is sustainable.
Hong Kong and China funds attracted more than HK$5 billion last week, the highest in the past four months.
Capital has been flowing into Hong Kong equities and property amid a strong Hong Kong dollar.
Meanwhile, mainland investors have been plowing capital into Hong Kong due to a weaker yuan.
China’s economic growth is likely to bottom out at 6.7 percent in the second quarter, above market expectations for 6.5 percent growth.
Real interest rates remain high, with inflation at just under 2 percent, giving Beijing plenty of room to cut interest rates.
China held back from monetary stimulus last year for fear of stoking yuan depreciation and causing a massive capital outflow.
China’s foreign exchange reserves plunged more than US$800 billion, putting Hong Kong and mainland stock markets under pressure.
But things have changed.
Global markets are focused on Brexit and the Chinese yuan has secretly lost about 7 percent in the past 12 months.
That is set to benefit Chinese exporters and related sectors.
Will the yuan continue to weaken? How much further will it fall?
There is limited downside for the yuan before the G20 meeting.
If Beijing unveils monetary stimulus measures after the G20 meeting, the yuan might fall another 3 percent.
That would help reduce China’s high financing costs and ease the pressure of an economic slowdown.
The Chinese central bank might take action in August.
As for the US market, many optimists believe the Dow Jones might top 20,000 points.
The US benchmark is highly influenced by the earnings of four technology giants, namely, Facebook, Google, Amazon and Apple.
Apple reported better than expected results, driving its share price back up.
The S&P 500 and the sales ratio of these tech companies are at a 15-year high.
Apple’s second-quarter earnings saw a decline for the fifth straight quarter. Many analysts have cut Apple’s earnings forecast for the third quarter.
The technology-heavy S&P 500 index might set a new high given that several leading counters are rising.
But the overall US market might slip due to weakening oil prices.
Will a switch to emerging markets from developed markets be the next big trend?
Developed markets, particularly the US, have been setting new highs in recent years while emerging markets have been struggling with capital outflow due to the strength of the greenback.
In December 2016, the Fed raised interest rates by 0.25 percent for the first time since 2008 but it was more a gesture than anything else.
It’s widely expected there will be another hike of 0.25 percent or no hike at all for rest of the year.
The dollar has already hit the ceiling, which would benefit emerging markets.
This will create a window for emerging markets to cut rates, stimulate domestic credit and boost stocks.
Nevertheless, it remains unclear whether the shift in capital will be sustainable or short-lived in the wake of Brexit.
Some would say it’s too early to predict a bull market given that stocks that have powered the market rally are mostly REITs and utility plays.
The next few weeks will be critical for investors looking for a clearer direction.
This article appeared in the Hong Kong Economic Journal on July 28.
Translation by Julie Zhu
[Chinese version 中文版]
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