Hong Kong equities face a number of strong headwinds. The trading range of the Hang Seng Index is likely to move downward to 21,000-22,500 points in the near term.
Interest rate concern is one of the major negative factors.
The latest Federal Reserve “dot plot” has signaled three rate hikes in 2017. Local interbank rates have already posted a substantial bounce from the trough.
It’s believed that Hong Kong banks are likely to hike interest rates once the one-month HIBOR rises to 0.9 percent.
The direction of fund flows may also become a hurdle for stocks.
First of all, higher US rates could lead to fund outflows from the region.
Currently, Beijing has placed top priority on stemming capital outflows amid sustained renminbi devaluation. Expectations of fund inflows from China into Hong Kong equities become less likely, at least in the near term.
As such, the upside of Hong Kong equities would remain subdued at least in the first quarter of next year.
Investors are advised to cap their exposure to less than 30 percent of the portfolio until market sentiment improves.
As regards the specific counters to bet on, I noted last week that increasing geopolitical risk would benefit a number of national defense stocks. I will stick to such recommendations.
AviChina Industry & Technology (02537.HK), Hangzhou Hikvision Digital Technology Co. (002415.CN), China CSSC Holdings Ltd. (600150.CN), Aisino Corp. (600271.CN),CSSC Offshore and Marine Engineering Group Co. Ltd. (600685.CN) and China Shipbuilding Industry Co. (6001989.CN) are some of the companies worth following.
Investors can also add some infrastructure and machinery stocks on dips, as well as materials plays such as Angang Steel (00347.HK), Maanshan Iron & Steel Co. (00323.HK) and Aluminum Corp of China (02600.HK).
The coming Lunar New Year could trigger trading interest in casino plays such as Galaxy Entertainment Group (00027.HK) and Sands China (01928.HK).
Banking stocks such as HSBC Holdings (00005.HK) are also expected to outperform in a rising interest-rate cycle.
This article appeared in the Hong Kong Economic Journal on Dec. 20
Translation by Julie Zhu
[Chinese version 中文版]
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