Long new economy, short old economy

April 17, 2015 15:47
New-economy stocks like Tencent Holdings have outperformed property and financial plays since 2009. Photo: HKEJ

The United States will remain the world’s largest economy in 2023, when its gross domestic product is expected to grow to US$24.8 trillion from US$16.8 trillion this year, according to the latest forecast by the US Department of Agriculture.

It will represent 20 percent of the global economy in 2030, compared with 23 percent in 2015 and 25 percent in 2006.

On the other hand, China’s GDP will double from this year’s level by 2023 if it maintains an annual growth rate of 7 percent. India is expected to become the fourth-largest economy behind Japan by that year.

China and India are the engines that will drive global economic growth in next 15 years, while the US, Britain, eurozone and Japan will continue to post low growth.

I agree with these projections. But it’s a totally different story if you're considering when to enter and exit the market, and which stocks or commodities to choose. There's no such thing as a free lunch. Investors have to follow the overall trend instead of going against it.

China’s old-economy sectors have been moderating after rebounding 22 percent in 2009 from a trough of 2 percent growth in 2008. These sectors rose by only 4 percent in the first quarter of this year.

By contrast, the new economy has maintained an annual growth rate of over 18 percent after hitting a record high of 24 percent in 2010. These sectors continue to show strong growth momentum.

Therefore, investors should underweight old-economy, and overweight new-economy sectors.

Over the last decade, property and financial stocks are no longer the stars of the Hong Kong market. CKH Holdings (00001.HK) has been hovering around HK$160 since 2007, Sun Hung Kai Properties (00016.HK) continues to fall back after peaking at HK$175.4 in 2007, and New World Development (00017.HK) has been lagging behind since hitting a high of HK$24.88 in 1997.

In the banking sector, HSBC Holdings Plc (00005.HK) has dropped to HK$70 from its peak of HK$116.2 in 2007, Hang Seng Bank (00011.HK) never rebounded after a record high of HK$163 in 2008, and Bank of East Asia (00023.HK) has kept moving south since it hit HK$48.95 in 2007.

Global property and financial stocks could have fared even worse if there had been no quantitative easing between March 2009 and November 2011.

By contrast, new-economy stocks like Tencent Holdings (00700.HK) have outperformed property and financial plays since 2009. New economy is taking over the helm from the old economy across the world.

How about the next decade? The stock market is a voting machine in the short term, as investors vote for companies. In the long run, the market is an evaluation machine on the basis of company earnings. The stock price is set to surge sooner or later if the company's earnings growth has beaten GDP and CPI growth.

Therefore, investors should look for high-growth stocks, which are likely to maintain a growth rate of over 20 percent in net profit for next five to 10 years. They should hold on to stocks with net profit growth of over 10 percent for the next five to 10 years, and get rid of those with contracting profit or loss.

The stock market could get very dramatic during the so-called Goldilocks period, when investors could place bets on second-tier stocks.

The Hang Seng Index is likely to hover in the range of 26,500 to 28,500 points in the short term, but it remains unclear when the market will peak or reverse the trend.

The market has recently acted in the same way it did in August 2007, when Beijing announced the “through-train” scheme. The market posted whopping gains for three months until it entered a bear cycle.

Therefore, the Hong Kong market could be very attractive in the second quarter, but investors should not bet heavily on large property or financial stocks. Instead, they should switch to some beneficiaries of the new economy.

This article appeared in the Hong Kong Economic Journal on April 17.

Translation by Julie Zhu

[Chinese version中文版]

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Chief Adviser at the Hong Kong Economic Journal