Foreign funds may create volatility in HK market

April 28, 2015 17:57
If the uptrend in the stock market continues until May, Hong Kong could overtake Japan in market capitalization. Photo: HKEJ

I had a recent discussion with friends about the bullish stock market, and they believe that most foreign funds are here to make a quick profit.

Mainland investors, on the other hand, have a long-term view of the market, and this is the group of investors that the government is likely to support.

The huge gains in both the mainland and Hong Kong markets in recent weeks have buoyed investor sentiment. But many uncertainties remain.

Currently, the US market has the largest capitalization at US$15 trillion, followed by China with more than US$7 trillion.

Hong Kong has a market capitalization of US$5 trillion. If the current uptrend extends into May, its market cap is likely to surpass that of Japan.

Chinese companies already have a combined market cap of over US$10 trillion, if we count those listed in Hong Kong, which account for nearly 70 percent of the local market cap.

In fact, China is very likely to surpass the United States as the world’s largest equity market within three to four years if it continues to surge at the current pace.

How about the valuation level? If we divide the market cap by GDP, the US ratio is around 0.8, while that of China is 1.

However, everything changes quickly in the market.

This round of market rally in Hong Kong has been driven largely by mainland policy. The central government's policies have a large impact on the local market.

However, the water that bears the boat can also swallow it up, and as such, the local market should not rely solely on mainland policy.

The red-hot mainland stock market is also facing headwinds, including economic slowdown and heavy dependence on government policy.

The real economy remains sluggish due to excess capacity. Some think that the government has sought to stimulate the financial market in order to turn public attention away from the weak economic growth.

On the other hand, the government has various means at its disposal to cool the market if it feels a bubble is developing.

Investors should be wary of the long queues for initial public offerings on the mainland. The IPO market is set to cool once the stock market turns gloomy.

The Chinese government has the incentive to buoy the financial market by stepping up direct financing and reducing the long-time dependence on indirect financing from banks.

The large influx of money from mainland China and other overseas capital sources is likely to continue.

The exchange rate of the Hong Kong dollar has been fairly strong, prompting the Hong Kong Monetary Authority to inject a total of HK$71.49 billion since April 9.

Many institutional investors have missed the opportunity presented by the swift market rally in early April. What kind of strategy should they adopt?

The Hong Kong market will encounter some corrections, although the uptrend remains intact.

The government will unveil further stimulus measures to maintain a 7 percent GDP growth this year. If so, the stock market rally will continue to rely on government policy, which could be very risky.

Foreign funds usually take quick profit in the Hong Kong market within one or two weeks. They are just waiting for the right time to cash out.

However, mainland funds will hold stocks for a longer period, and some private equity funds may adopt a more flexible strategy.

Individual investors should keep a close watch on market trends.

Market volatility is set to increase in the second quarter due to frequent entry and exit of capital from institutional investors.

This article appeared in the Hong Kong Economic Journal on April 28.

Translation by Julie Zhu

[Chinese version中文版]

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adjunct professor in the Department of Finance at HKUST Business School