Date
19 November 2017
Machinery and railway stocks are back in favor amid renewed interest in China’s Belt and Road initiative. Photo: Xinhua
Machinery and railway stocks are back in favor amid renewed interest in China’s Belt and Road initiative. Photo: Xinhua

US equities expected to outperform in the first quarter

Italy’s Prime Minister Matteo Renzi said he is preparing to resign after voters dismissed his plans for constitutional reform.

While European equity markets have reacted calmly to the referendum result, political uncertainties will continue to cloud the region’s outlook.

Three core members of eurozone – Germany, France and Italy – will all hold elections next year.

Amid fears that right-wing populist parties, particularly Italy’s anti-establishment Five Star Movement, are going to win the elections, and in view of uncertainties surrounding the Brexit process, funds will continue to flow out of the eurozone.

The first choice of these funds will naturally be the US market, not least because of the pro-growth policy of President-elect Donald Trump.

Expectations of higher interest rates and a stronger dollar will also be powerful draws to investors.

As such, it is almost certain that US equities will outperform in the first quarter.

Meanwhile, the launch of the Shenzhen-Hong Kong Stock Connect on Monday is a definite plus for both markets from a long-term perspective.

At the moment, however, we seem to be experiencing some profit-taking by investors who have been front-running the stock link announcement by taking positions in shares like Hong Kong Exchanges & Clearing Ltd. (00388.HK). Some brokerage plays are also under pressure.

Emerging markets are out of favor for the time being, and that could also weigh on the near-term sentiment in Hong Kong and China markets.

That said, recent economic data showed that China’s economy is stabilizing, which suggests that interest could return again, say, in six months.

Things like the inclusion of A shares in the MSCI emerging market index, if realized, could provide the trigger for the next uptrend.

For short-term trading opportunities, investors can look at machinery and high-speed railway stocks, which have picked up recently amid renewed interest in China’s Belt and Road initiative.

Sinotruck Hong Kong Ltd. (03808.HK), Lonking Holdings (03339.HK), CRRC Corp. (01766.HK) and China Railway Construction Corp. (01186.HK) are some of the interesting plays in this category.

This article appeared in the Hong Kong Economic Journal on Dec. 6.

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

columnist at the Hong Kong Economic Journal

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