19 January 2019
Steel stocks could outperform the market given China’s drive to eliminate excessive capacity in the industry. Photo: Reuters
Steel stocks could outperform the market given China’s drive to eliminate excessive capacity in the industry. Photo: Reuters

Hong Kong equities dominated by short-term pressure

Many countries have launched monetary easing measures after the 2008 financial crisis to stimulate their economies.

However, loose monetary policy has led to lots of side effects, prompting people around the world to seek changes as reflected in the Brexit vote and the surprising victory of Donald Trump.

Meanwhile, Trump has selected several hawkish personnel for his team. He named Peter Navarro to head the as-yet-uncreated White House National Trade Council. Navarro believes that trade with China is a zero-sum game the United States is losing.

Wilbur Ross, Trump’s pick for commerce secretary who is also hawkish toward China, doesn’t bode well for steady ties.

And other appointments to key military posts are set to stimulate an arms race among the US, China and Russia.

Next year is hence shaping up to be a year full of political uncertainties, not to mention the potential rise in geopolitical risks in Asia Pacific, the Middle East, Eastern Europe and South America.

I have predicted earlier that there will be 100 days of honeymoon after Trump’s inauguration on Jan. 20. That would benefit US stocks and dollar assets and investment instruments.

For that to happen, it depends on whether Trump will be able to form a powerful government.

As far as the Hong Kong stock market is concerned, it would be critical for the Hang Seng Index to defend the 21,000-21,400 support range.

With mainland Chinese enterprises contributing more than 70 percent of earnings of the Hang Seng Index, further weakness of the yuan does not bode well for the market outlook.

The coming month will be a peak demand period for funds. We need to watch the interbank rates to see if there will be more downward pressure coming from that side.

Investors are therefore advised to stay on the defensive side.

Individual sectors can still outperform. For instance, steel and cement stocks are attractive under the nation’s drive to eliminate excessive capacity. The debt-to-equity swap initiative will also help.

Elsewhere, Chinese medicine plays and the construction equipment sector are also interesting.

This article appeared in the Hong Kong Economic Journal on Dec. 23

Translation by Julie Zhu

[Chinese version 中文版]

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columnist at the Hong Kong Economic Journal

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