The Hang Seng Index is marching toward 27,000 points, with a gain of over 20 percent since the start of the year. The benchmark has jumped almost 50 percent from the trough of 18,000 points in early 2016. In particular, leading internet stocks have soared by three or four times year-to-date.
It’s critical to buy the right stocks at the right time. If investors have entered the market at 18,000 points, they could easily reap good returns. And if they want to jump on the bandwagon, it’s better to take a second look.
Internet giants have promising outlook, but how long can they sustain their current valuations? People realize that the internet has had far-reaching impact in our everyday life dating back to the early 2000. However, the tech-dominated NASDAQ index slumped to 1,200 points in 2002, and then surged to the current 6,400 points. If internet stocks went through another slide of 30 percent as we saw early last year, would you be able to keep calm?
The US Federal Reserve opened its two-day monetary policy meeting on Tuesday, and it’s widely expected that it would leave key interest rates unchanged. In fact, interest rates may not necessarily keep steady without a rate hike, since shrinking the balance sheet might also do the trick.
Spiking bond yields won’t trigger a sell-off in the stock market if the valuation is at attractive levels. Nevertheless, any news could trigger a market crash if the stock market is at its peak.
Zhuge Liang has long been recognized as the man of wisdom throughout China’s history. From 228 until his death in 234, Zhuge launched a total of five northern expeditions, all except one of which failed. He failed after the water transport route was cut off and his soldiers ran out of food.
The story holds some parallels to the stock market in terms of barriers. High valuation is the biggest hurdle for investors to make profit regardless of the exciting prospects of internet companies and strong growth momentum of China’s economy.
Certainly, high valuation could edge even higher. However, central banks have started to tighten monetary policy, which has sent an alarm. Investors should wait for a deep correction in order to obtain good returns.
As billionaire Warren Buffett has said: “Investors should remember that their scorecard is not computed using Olympic-diving methods: degree of difficulty doesn’t count.” Therefore, investors should take the easy path rather than making impulsive decisions.
This article appeared in the Hong Kong Economic Journal on July 26
Translation by Julie Zhu
[Chinese version 中文版]
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