Equities: 3Q outlook positive but longer term view cloudy

July 19, 2018 12:02
Market participants have calmed down following their panic reaction to the US-China trade war as the situation is unlikely to worsen in the near term. Photo: Reuters

China’s broad M2 money supply grew 8 percent in June from a year ago, missing forecasts for an expansion of 8.4 percent. The nation’s total social financing, a broad measure of credit and liquidity in the economy, stood at 1.2 trillion yuan (US$178.18 billion), compared with an expected 1.4 trillion yuan.

Despite the weaker numbers, the domestic stock market bounced higher over the past few days.

This suggests that market participants have somewhat calmed down following their panic reaction to the trade war between the United States and China as the situation is unlikely to worsen in the near term.

China has responded in a sensible way to the US tariffs, giving Washington no excuse to further escalate the conflict.

Washington's plan to impose additional tariffs on US$200 billion worth of Chinese goods will undergo two months of public consultation. That means the tariffs will not take effect until Aug. 30 at the earliest, if everything goes according to plan.

Like China, the US also does not want a trade war; it is going to hurt American companies, too. As such, it is likely that the two nations will come back to the negotiating table in the coming month or so, and stock markets will react positively if there is any sort of agreement.

Developments on the monetary policy front may also be supportive in the next few months.

China is seeking to deleverage as part of its monetary policy this year. However, the global environment is so uncertain. Domestic A shares slumped in late June, and the Chinese central bank may relax the monetary policy in the third quarter to prevent a hard landing. Meanwhile, the US won’t further tighten until the next meeting of the Federal Open Market Committee on Sept. 25.

Meanwhile, mainland investors are returning after eight weeks of net outflow. We saw net inflow from southbound trading last week, and the biggest weekly net inflow since March. That might signal the sell-off in the Hong Kong market has come to an end.

Since the launch of Stock Connect program, the influx of mainland funds typically coincides with a stronger Hong Kong equity market, and vice versa.

Company share buybacks are also supporting the market. Hong Kong has reported over HK$5 billion of share buybacks so far this month. That’s a sign that managers think their companies' thinking shares are undervalued now.

With the US mid-term election coming up in November, drastic moves from the Trump administration are unlikely.

Internet stocks may continue to rally unless quarterly earnings results from US tech firms are very negative.

As such, stock markets might do well in the third quarter.

Nonetheless, the big trend is that major central banks are tightening. The flattening US yield curve and weak leading indicators such as the falling copper price are not good signs either.

Investors should therefore consider taking advantage of a stronger market to pare back their positions.

This article appeared in the Hong Kong Economic Journal on July 17

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal