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HSI And STI Likely To Hit Record Highs This Year
Aspire, Dr Chan Yan Chong | 24 April 2015
By: Dr Chan Yan Chong
Articles (200) Profile

Outlook for HSI and STI

Source: FactSet Fundamentals (As at 24 April 2015)

The Hong Kong stock market has suddenly surged ahead recently, and trade volume has also increased significantly. The Hang Seng Index (HSI) jumped a massive 2,000 points, and daily transaction has almost tripled from about HK$80 billion in March to the current HK$200 billion. The momentum is nothing short of phenomenal.

Over in China, this phenomenon had already taken place at the end of last year. Last November, when the Shanghai-Hong Kong Stock Connect scheme officially went live, the Chinese government announced a series of stock market-friendly policies.

Along with the hype surrounding the “One Belt, One Road” plan, the setting up of the Asian Infrastructure Investment Bank is a further demonstration of China’s financial and political strength and is a shot in the arm towards the realisation of the “One Belt, One Road” ideal.

The recent behaviour of the Hong Kong bourse can only be described as ‘playing catch up.’ This is because during the initial months after the launch of the stock connect scheme, China’s mutual funds without the Qualified Domestic Institutional Investor licence were not allowed to buy and sell Hong Kong shares via the scheme.

This restriction was lifted in end March this year. As a result, we saw a massive influx of funds into Hong Kong.

Source: FactSet Fundamentals (As at 24 April 2015)

The sudden surge in the Hong Kong stock market has also prompted the Singapore bourse to rise; the Straits Times Index (STI) has risen to a new 7.5-year high, and is now fast approaching the historical high of 2007.

Both the Hong Kong and Singapore stock markets are still playing catch up, so there is a high chance for the HSI and STI to hit record highs this year.

Don’t Worry About China’s “Bubble”

Now, we need to pay closer attention to the Chinese central government’s policies. With the stock market in a feeding frenzy, China’s Securities Regulatory Commission will likely move to cool down the feverish stock market. I do not think the issue of the extent of the correction is an important one.

As everyone knows, it is still a bull market at the moment, so it does not matter how big the correction should be; you can take up position anytime as long as you are comfortable with the extent of the correction.

Investors should avoid setting their entry point too low when bargain hunting. When you are in a bull market, you should buy in as long as you are happy with the degree of correction. Always remember though, that even the strongest bull run will run out of steam eventually.

A rocketing stock market might lead many to question if a “bubble” has been created. However, the situation this time is unique. Even Hong Kong’s Finance Secretary John Tsang publicly said that this is not a bubble but a genuine rally backed up by valid economic factors, which in this case is the Shanghai-Hong Kong Stock Connect scheme.

Chinese Government Assures: No “Bubble”

Further assurance is found in the articles published by the Chinese government’s mouthpiece People’s Daily and the Xinhua News Agency, which stated that the stock market rally this time is a healthy one. The Chinese central government clearly would like to see a bullish stock market.

Along with rising property prices, this will encourage the middle class to spend more. This is important as China’s economy is transiting from an export-oriented economy to a consumption-driven economy.

Coupled with rate cuts and reduction of bank reserve requirements, the stock connect scheme is not a standalone policy, but is a harbinger of an epoch of great opportunities. I continue to favour the A-shares, while also being positive on Hong Kong H-shares, as well as blue chips, red chips and S chips stocks in Hong Kong and Singapore.

So far, the average price-to-earnings ratio (P/E) of the HSI is still at only 12 times, a relatively low level in the history of the bourse. When the Hong Kong stock market went into a crazy rally in the past, HSI’s P/E could rise to more than 20 times.

So, if you are an inexperienced investor, I would advise you to buy ETFs; you can either buy the HSI ETF, H-share ETF or A-share ETF. China’s grand dream of “One Belt, One Road” has become the hottest investment theme in the stock market, of which Neptune Orient Lines (NOL) is one of the best “concept” stocks to put your money in.

Hong Kong Stocks On A Roll

Transactions on the Hong Kong stock market surged suddenly after the Easter holidays, and now the daily turnover is hovering around the HK$200 billion market. Will this be the new norm from now?

If so, Hong Kong Stock Exchange’s (0388) recent transacted price of HK$300 per share is not expensive at all. It has only been half a month since the start of the frenzy in the Hong Kong stock market, so it is not easy to determine how long this craze can be sustained, but it does reflect investors’ confidence in the bourse.

The powerhouse behind the rally in Hong Kong stocks this time is not the mainland Chinese housewives but international institutions. In the past, these institutional players were doubtful that Chinese A-shares could sustain the rally.

As the ‘world’s freest economy’, it is natural for Hong Kong to attract a huge influx of hot money from overseas. Of course, hot money flows have always been transient.

China-HK Connect Important For Both Countries

Despite the emergence of Shanghai and Shenzhen as China’s financial centres, the role of Hong Kong is still irreplaceable. As of now, the yuan is still not freely exchanged and its exchange rate is fixed.

The stock markets of Shanghai and Shenzhen can only accept limited overseas funds while the country’s banking sector is still driven by state-owned banks.

However, the internationalisation and liberalisation of the yuan, and the complete opening up of China’s stock market and banking sector, are long-term goals of the Chinese government and a part of Xi Jinping’s Chinese dream. Hong Kong is primed to play a long-term role in the internationalisation and liberalisation of the yuan.

The stock connect scheme is an important step in using Hong Kong to bring about the internationalisation of China’s stock markets. As with previous policies that involved cross-strait co-operation, the scheme is one that is mutually beneficial.

In addition to Hong Kong, the Chinese government can choose to collaborate with other international financial centres like Singapore or London. However, since Hong Kong is a part of China, it is more likely that the central government will allow Hong Kong to take the first cut of the business opportunities that the financial reformation in China brings before sharing the rest of the pie among foreign countries.

China will still need to ensure Hong Kong’s prosperity after all. For this reason, Hong Kong will always be the first “offshore” test bed of China’s financial reformations.

By capitalising on the flexibility offered under the “one country, two systems” agreement, Hong Kong can be regarded as an “offshore” centre that is also entitled to the opportunities available to “offshore” centres while remaining part of “one country”.

Dr Chan Yan Chong is a renowned investment expert with many accolades under his belt.

Please click here for more information about this author.

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