The Hang Seng Index has rebounded nearly 6,000 points from the trough so far this year, and some investors are beginning to doubt if there is still much upside left.
While there are indeed some negative issues clouding the short-term outlook, I continue to believe that capital inflow from mainland investors will benefit the market over the longer run.
I would advise investors to boost equity exposure to 50 percent of their investment portfolios to take advantage of whatever corrections that may come along with short-term uncertainties, which includes the US presidential election, Deutsche Bank saga and US rate decisions.
As of now, the fifty-day moving average of around 23,000 points is a key support level for Hong Kong’s benchmark index.
Among various issues, market participants are particularly keeping a close eye on a proposed US$14 billion penalty by US regulators on Deutsche Bank for alleged mis-selling of mortgage securities, and its potential fallout on the financial sector.
I believe compromises will be made and the issue will be resolved in the end.
As Germany has opposed EU members previously on the issue of bank bailouts, it’s most likely that shareholders and creditors of Deutsche Bank might bear most of the burden arising from the US fine.
The German government may offer some help to restore market confidence. Meanwhile, there might be pay cuts for senior management or downsizing moves.
European Banking Authority stress tests carried out earlier suggested that there is limited risk for another Lehman-type crisis.
Looking beyond these near-term hurdles, the Hong Kong market will find support from several China-related factors.
First of all, recent macro numbers point to a stabilizing mainland economy. And policy environment will remain benign overall as authorities will seek to protect the recovery.
The soon-to-start Shenzhen-Hong Kong stock link will boost capital inflows further from China into Hong Kong. Ample liquidity, along with a low-interest-rate environment, will continue to support the equity market.
I continue to like big caps like Tencent (00700.HK) and China Life (02628.HK). Some industrial plays are also worth following.
China property counters, however, may face some headwinds as authorities in some mainland cities take steps to curb a renewed surge in home prices. At least 14 cities have unveiled new measures to cool the property market.
This article appeared in the Hong Kong Economic Journal on Oct. 4.
Translation by Julie Zhu
[Chinese version 中文版]
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