23 October 2016
Global markets may have underestimated the chance of a Fed rate hike in September given the strong job market. Photo: Reuters
Global markets may have underestimated the chance of a Fed rate hike in September given the strong job market. Photo: Reuters

HK stocks: Two hot trading themes to watch

Better than expected US employment data has boosted market appetite for risky assets such as equities which benefit the Hong Kong market.

Also, the Brexit vote prompted some global funds to pare their exposure to Britain and Europe and allocate more assets to Asia including Hong Kong.

Monetary stimulus from several central banks added to the bullish sentiment.

Last week, the Bank of Japan unveiled a 28 trillion yen (US$273 billion) spending package.

Bank of England cut interest rates by 0.25 percent while the Reserve Bank of Australia slashed its benchmark interest rate by a quarter point to a fresh low of 1.5 percent.

Given that the market run-up is mainly driven by foreign capital, highly liquid index heavyweights have benefited the most.

Such stocks may continue to be favored.

Elsewhere, there are two interesting trading themes worth watching. One is stock buyback theme and the other is Shenzhen Hong Kong Stock Connect theme.

These relate to stock buybacks and Shenzhen-Hong Kong Stock Connect.

HSBC Holdings’ US$2.5 billion share buyback plan (that’s 2 percent of outstanding) has helped attract strong buying interest from foreign funds, overshadowing the negative impact of its decision to drop its progressive dividend policy and ROE (return on equity) target.

The buyback plan came after the bank sold its Brazil business. That has ignited speculation that the buyback scheme could expand if HSBC disposes of other assets, like its Bank of Communications stake (03328.HK) in the future.

By the same logic, companies sitting on a large cash pile might attract interest for their potential to buy back shares, especially if the shares are trading at a discount.

For example, China Mobile (00941.HK) has a lot of cash but lacks good projects.

Also, Wharf Holdings 00004.HK) has said it might sell some telecom assets. The stock trades at about half its net asset value.

Premier Li Keqiang wants Shenzhen-Hong Kong Stock Connect launched this year.

With less than five months left before the year is out, the market expects the cross-border trading scheme to be finalized soon.

Investors could accumulate relevant plays in advance of the opening.

These include China Vanke Co. (02202.HK), Hisense Kelon Electrical Holdings Co (00921.HK), BYD (01211.HK), Angang Steel Co. (00347.HK), Zhejiang Shibao Co. (01057.HK), Northeast Electric Development Co. (00042.HK) and other dual-listed stocks of which their Hong Kong-listed shares are a lot cheaper than their Shenzhen-listed counterparts.

Hong Kong Exchanges and Clearing (00388.HK) will also be a good gauge of the stock connect theme.

Back to the broader market, technical analysis points to 23,433 points as the next key resistance level.

If market turnover swells sharply, that could be a signal the market is overheated.

Market consensus on a US interest rate hike in September puts its chances at under 30 percent. But given the strong job data and political constraints in a presidential election year, the probability could be higher.

Such rate hike concerns could trigger a decent correction of Hong Kong shares, perhaps by the end of the month.

This article appeared in the Hong Kong Economic Journal on Aug 9

Translation by Julie zhu with additional reporting

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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