Ample liquidity to support global equities in second quarter

April 06, 2017 16:54
Given low bond yields and high property prices, global equities are still relatively cheap. Photo: Reuters

The market is closely watching the first meeting between Chinese President Xi Jinping and US President Donald Trump to be held at Trump’s Florida estate on Thursday. The meeting will set the tone for future US-China relationship and bilateral strategic and economic cooperation.

Also, the upcoming French presidential election late this month is a market focus. Marine Le Pen, leader of France's far-right National Front party, has failed to gain a leading position in the latest polls.

However, it remains uncertain what the final outcome will be after the market was caught off guard with the US election and Brexit.

As such, investors tend to adopt a more conservative approach and park their funds in safe havens such as bonds amid political uncertainty.

That’s why major government bond yields have hovered around three-month lows recently. Ten-year US Treasury yield has eased to 2.35 percent despite two rate hikes since December last year, down from a peak of 2.62 percent in late 2016.

Meanwhile, the UK government bond yield also hovers at a low of 1.06 percent after the nation started a two-year exit process from the European Union. At present, Italy is the only one in Europe that sees its government bond yield trading at almost the highest level in the past one year, or 2.26 percent.

Regarding the property market, Hong Kong’s housing prices have shown no sign of cooling, bolstered by hectic new home sales in recent months.

By contrast, China tightened property curbs in first-tier cities after the Lunar New Year holiday and the restrictions have been expanded to numerous lower-tier cities. Chinese banks also tightened mortgage lending and home transactions have fallen off dramatically.

The mainland property market has been under the spotlight again after the State Council announced the Xiongan New Area development plan.

Straddling Beijing and Tianjin, Xiongan will be built into an economic hub like Shenzhen and Shanghai’s Pudong. Within a few hours of the announcement, housing prices in nearby counties reportedly surged to 14,000 yuan per square meter from 4,000 Chinese yuan.

As a result, the authorities have rushed to shut down all housing transactions in the area. That shows that despite the falloff in property transaction volumes, the mainland market still has ample liquidity and demand for property remains strong.

Globally, there is a large amount of funds sloshing around looking for opportunities.

Given the liquidity abundance, low bond yields and high property prices, equities still look relatively cheap.

The Hang Seng Index has an average P/E ratio of 13.5, the Shanghai Composite Index is at 19, S&P 500 at 21, and DAX at 20.

Equities hence could continue to edge up in the second quarter.

This article appeared in the Hong Kong Economic Journal on April 6

Translation by Julie Zhu

[Chinese version 中文版]

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head of private banking and trust services at Hang Seng Bank