Lessons investors should learn from the market crash

July 21, 2015 17:30
Telecom operators such as China Mobile should benefit from the creation of a tower company and 4G growth momentum. Photo: Bloomberg

Beijing’s intervention measures to stem the recent panic sell-off in the stock market have some unexpected side-effect.

Rumors have it that the government has outlined several plans to withdraw trillions of yuan of government money from the stock market, but that the top securities regulator has shot down the proposals.

The fact remains that the government has requested institutional investors not to sell their holdings until the Shanghai market creeps back to 4,500 points.

This indicates that the government may not pull out of the market until the market begins another rally. It’s still too early to say how the government would exit.

The market has been trading range-bound in recent days. Investors should not worry about heavyweight stocks because the government will continue to hold them in the medium and long term.

However, a number of small-cap, start-up stocks may be hard to sell due to their extremely high valuations. These stocks could pose a threat to the quality of assets of mainland banks and brokerages.

I suggested last week that investors should take advantage of the market crash in first two weeks of July to find out which stocks have weak fundamentals and readjust their portfolio. They should also collect some over-sold stocks before the Hang Seng Index rebounds to above 25,000 points.

More investors would switch bets to policy-support sectors. Tencent Holdings (00700.HK) has been sought after as the US market favors internet technology leaders. Telecom operators like China Mobile (00941.HK) and China Telecom (00728.HK) should benefit from the creation of a tower company and 4G growth momentum.

Mainland property plays will see improving sales amid monetary easing measures. Investors should also switch to military, airline and infrastructure stocks to capture future upside.

The central government should consider criticisms about its stock market intervention measures. Vice Finance Minister Zhu Guangyao said China’s intervention in the stock market was a sign of "mismatch for supervision" and Chinese regulators should learn from the experience of more mature stock markets such as those in the United States and Britain.

The remarks are obviously intended to restore foreign investors’ confidence in A shares and might indicate some leadership reshuffle in the securities regulator.

More importantly, China intends to fight for renminbi to be included into the International Monetary Fund's SDR basket this October.

Off-market financing, which offers three or even five times leverage for investors, has inflated the bubble in A shares. Mainland authorities have been tightening its supervision over such financing activities to stem the market slide.

Anyway, it takes time for investors to regain their confidence in the mainland equity market. Foreign investors will come back to the market sooner or later as long as they perceive value in their investments. 

Investors should bear in mind that both Hong Kong and mainland markets will always be subject to policy changes in the long term. So if investors can’t beat 'em, they should join 'em.

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

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal