27 October 2016
Hong Kong and other Asian stocks have benefited from global capital inflows. Whether this will continue depends much on the currency factor. Photo: Reuters
Hong Kong and other Asian stocks have benefited from global capital inflows. Whether this will continue depends much on the currency factor. Photo: Reuters

Hong Kong equity rally still has some room to run

Major central banks have continued to pump money into the markets, sending massive amounts of capital circulating around the world looking for investment opportunities.

When selecting investment targets, global funds are expected to put more emphasis on the currency factor than on stock market trends, given the huge volatility of exchange rates, which will have a material impact on the overall return.

Capital has been fleeing the United Kingdom, and Europe in general, after the Brexit vote and emerging markets including Hong Kong and mainland China are some of the recipients of those funds.

The UK intends to postpone negotiations for leaving the EU until late 2019 since the new Brexit and international trade departments are not yet ready.

Elections on the continent, including those in France and Germany, could also delay the process of triggering Article 50 of the Lisbon Treaty.

That would add more uncertainty for the nation and further drive investors away. The pound sterling could face further downside risk.

Likewise, the US dollar may not post a strong rally before the presidential election in November, unless the Federal Reserve hikes interest rates in September.

The Japanese yen is also unlikely to surge amid the country’s continued monetary easing.

After a period of depreciation, China’s renminbi is likely to stabilize ahead of the G20 summit next month.

In particular, the redback will be officially included in the International Monetary Fund’s Special Drawing Rights basket of currencies on Oct. 1, raising the odds that the Chinese currency will be kept stable in the next few months.

In Hong Kong, the Hang Seng Index has rallied more than 3,000 points in the course of one and a half months.

Investors should get ready to take profit as long as market turnover exceeds HK$100 billion, which could be a sign that the market is overheating.

The next key resistance is 23,433 and weak economic data from the mainland could be a trigger for correction.

Before that happens, companies posting good interim results may stay in favor.

With Postal Savings Bank of China planning to raise US$10 billion in its initial public offering, Chinese banks may draw buying interest from foreign funds.

Laggards may catch up as investors switch out of stocks that have posted sharp gains.

The long-awaited Shenzhen-Hong Kong Stock Connect will be announced within this month, the Hong Kong Economic Journal reported on Monday.

Relevant plays, including dual-listed firms, brokerage companies, Hong Kong Exchanges & Clearing Co. (00388.HK) and fund management firm Value Partners (00806.HK), are likely to outperform.

Plays like CSOP FTSE China A50 ETF (02822.HK), iShares FTSE A50 China Index ETF(02823.HK), China AMC CSI 300 Index ETFJDR (03188.HK) and BOCI-Prudential – W.I.S.E. – CSI China Tracker Fund (02827.HK), are also worth following.

This article appeared in the Hong Kong Economic Journal on Aug. 16

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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