A slew of bad news hit the market recently, but it may turn out to be good news for Hong Kong equities.
The massive fines faced by Deutsche Bank and the possibility of a hard Brexit are increasing global economic uncertainties.
Britain’s decision to quit the European Union will continue to haunt the region for the next couple of years.
If the United Kingdom regains its border control after leaving the union, more EU members may follow suit.
And if these troubles lead to more capital outflows from Europe in the coming years, emerging markets including Hong Kong stand to benefit as safe havens.
Another potential danger comes from surging home prices in the mainland and the government’s recent steps to address the problem.
But rampant speculation on property shows that China has too much money sloshing around and looking for investment opportunities.
Mainland equities did well on the first day after the week-long holiday, a sign that investors could be shifting their funds to equities from the red-hot housing market.
In this regard, the launching of the Shenzhen-Hong Kong Stock Connect is expected to lead to stronger interest in Hong Kong equities as an alternative investment option for mainland investors.
China’s renminbi has weakened past 6.7 against the US dollar for the first time in five years. Its continued depreciation is another factor that could bring more mainland funds to Hong Kong.
There is also talk about major central banks switching from monetary easing to other measures to stimulate the economy. Meanwhile, the Federal Reserve is widely expected to hike rates before the end of this year.
These threats are overstated.
The market has already factored in a US rate hike.
As for Europe and Japan, which have been addicted to monetary easing for so long, shifting gear is no easy feat.
The chance for drastic policy changes in the near term is rather slim, given the lack of other workable policy fixes.
As such, I remain positive on the market outlook for this month.
I would suggest to investors to consider a basket of both defensive stocks for the steady return (such as real estate investment trusts and utilities) and high-growth tech plays such as Tencent (00700.HK) to ride the strong upward momentum.
A number of dual-listed stocks may also benefit from the stock link program, including Northeast Electric Development Co. (00042.HK), Shandong Xinhua Pharmaceutical Co. (00719.HK), Hisense Kelon Electrical Holdings (00921.HK), Zhejiang Shibao Co. (01057.HK), Weichai Power Co. (02338.HK) and China International Marine Containers Group (02039.HK).
This article appeared in the Hong Kong Economic Journal on Oct. 11.
Translation by Julie Zhu
[Chinese version 中文版]
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