Why investors should take a summer break

July 28, 2015 14:45
Beijing is keen to push its currency into the SDR basket, posing a threat to the dominance of the US dollar in global trading. Photo: Bloomberg

The Hang Seng Index has lost more than 1,000 points from last week's peak.

Volatility is set to increase as big investors bet on company earnings, a looming US interest rate hike and the Greek debt issue.

The Shanghai Composite Index is likely to trade in the 3,600 to 3,700 range while the Hang Seng Index may hover around 23,100 to 24,000 points.

This may be an opportunity for speculators.

The Hong Kong market is likely to be range-bound in the third quarter for lack of fundamental support.

Individual stocks and sectors may see a huge divergence.

I have suggested that investors buy over-sold small stocks and switch to good and defensive plays.

Also, they should reduce their stock investment to 30 percent of their portfolio and wait for turnover and market volatility to subside.

Bigger role

China is playing a bigger role in the global political and economic space, posing a challenge to the long-time dominance of the US.

As a result, frictions between China and the US are intensifying. The financial market is a battle front.

Beijing is keen to push its currency into the IMF's SDR (special drawing rights) basket.

Again, that poses a threat to the dominance and privileges of the US dollar in global trading.

In addition, several US investment banks have been bearish about A shares and Chinese stocks in recent years.

They have harshly criticized Beijing’s market stabilization moves for hampering market reform.

Foreign investors may be opposed to having A shares in the MSCI index anytime soon.

They have been shunning A shares in the belief that Beijing will weaken the yuan to boost exports and stimulate economic growth.

That means China’s economic growth may slow further, dragging on the China and Hong Kong stock markets in the third quarter.

Also, the Fed rate hike may see capital flight from emerging markets like China.

Investors should keep their cash and stay away from the market for the moment.

Foreigners have pulled money from A shares, leading to the sluggish performance of A-share ETFs.

H shares are also under pressure.

Gaming stocks

Short-term investors could bet on Macau gaming stocks and some oversold stocks after the recent market crash.

They should closely watch some heavyweight counters such as China Mobile (00941.HK) and Tencent Holdings (00700.HK).

Ping An Insurance Group Co. of China (02318.HK), China Pacific Insurance (02601.HK), Fosun International (00656.HK) could benefit from a weaker Chinese currency in its overseas investment.

Investors should collect some mainland property stocks and shipping and infrastructure plays relevant to “One Belt, One Road” strategy during the market correction.

Prudent players should focus on individual stocks and bonds that offer high dividend.

Some industrial stocks may be more attractive as they will benefit from a weakening yuan and falling raw material prices.

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

Translation by Julie Zhu

[Chinese version中文版]

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columnist at the Hong Kong Economic Journal