Following its recent gains, Hong Kong’s stock market is likely to see some profit-taking pressure in the coming days.
Investors will be cautious as China prepares for a week-long holiday following the National Day celebrations on October 1.
Uncertainty related to the November US presidential election may also contribute to a pullback in equity prices.
As Chinese funds have been playing a significant role in Hong Kong through the Stock Connect program, a long holiday in the mainland will certainly keep activity subdued in the short term.
It is believed that southbound trading represents 8 to 10 percent of market turnover in Hong Kong as of now.
As cross-border activities wane during the holiday, the Hang Seng Index could weaken to the 22,800 points level.
That said, the long-term big picture remains positive for the local equity market.
First of all, one should bear in mind that both the US Federal Reserve and the Bank of Japan are continuing to be quite accommodative in their monetary policies.
This will boost liquidity flows and provide support for the Hong Kong equity market.
Next, let’s not forget that mainland investors are eager to seek offshore investments to hedge against renminbi weakness.
Another factor that will underpin the local market is that Chinese insurers, which have been allowed expanded access to Hong Kong equities, are looking for blue-chips that generate steady return.
An upcoming link between Shenzhen and Hong Kong bourses and cross-border valuation gap in stocks — despite the recent rally, Hong Kong equities are still cheaper overall compared to A shares in the mainland — are other factors that will support continued fund inflows into Hong Kong.
Given the generally positive market prospects, three sectors in particular are worth watching.
The first is banking counters. As a major sector, they will be a major target of mainland investors.
The listing of China Postal Saving Bank (01658.HK) may trigger some correction after the sector’s recent rally, but over the long run, as long as the bad loan issue is under control, the outlook is quite positive.
I also prefer insurance plays, which are set to benefit from the market bounce and also have a good chance of reaping better investment returns due to the improved access to Hong Kong shares.
Ping An Insurance Group (02318.HK), China Life Insurance (02628.HK), China Taiping Insurance Holdings (00966.HK) and China Pacific Insurance Group (02601.HK) are all good targets for medium-term collection.
For short-term trading, cyclical plays like Macau gaming stocks could be interesting.
Gaming revenue in Macau has started to stabilize since the middle of this year after two years of contraction.
Industry leaders like Sands China (01928.HK), Galaxy Entertainment Group (00027.HK) and Wynn Macau (01128.HK) are some popular trading targets of fund managers.
This article appeared in the Hong Kong Economic Journal on Sept. 27.
Translation by Julie Zhu
[Chinese version 中文版]
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