Date
23 May 2017
Wall Street rally has spurred gains in equity markets in many parts of the world, including Hong Kong, but investors would do well not to get carried away. Photo: Reuters
Wall Street rally has spurred gains in equity markets in many parts of the world, including Hong Kong, but investors would do well not to get carried away. Photo: Reuters

Enjoy the equity bubble but stay alert for sudden reversal

The stock market meltdown two years ago saw numerous China and Hong Kong funds suffer badly. Following the debacle, fund managers were criticized for failing to book profits in time on the gains recorded earlier.

Well, there is nothing wrong with going long in a bubbly market, which can be a very rewarding ride, as long as one stays vigilant and is prepared for a sudden reversal.

Coming to the current situation, we can say that investors have again become complacent.

We should bear in mind that the US stock index has not posted a daily movement of over 1 percent for quite some time.

And most of the action is in the small and medium-caps, suggesting investors are very willing to embrace risk.

Besides, put options (the right to sell stocks at a predetermined level) are really cheap now.

Since the US equity rally largely hinges on expectation of favorable policy changes from the Trump administration, and the cumulative gain is large, with the market already so crowded, if something happens and traders suddenly change their minds, lots of people won’t hesitate to exit right way.

Hong Kong equities are healthier compared to US peers, given the steady pace of advance and moderate accumulated gain so far here. Still, a prudent approach is recommended.

Now, we come to the question: what should we do to play safe? 

Well, this is my game plan.

Since exposure control is of paramount importance in this situation, I have trimmed my portfolio from last Thursday.

At the same time, I maintain my derivative positions (mostly on Hong Kong equity indices) because the most you can lose is the option premium, making it a safer way to play the market.

As long as corrections remain small, I guess the party will go on. But if there is a notable pullback, investors should forget about buying on dips and instead should run for the exit.

In an overdone market, a reversal is going to do much damage and last for quite some time.

This article appeared in the Hong Kong Economic Journal on Feb. 21

Translation by Julie Zhu

[Chinese version 中文版]

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RC

Director, Asset Management at Ample Capital Limited.

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