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Xi’s Asia-Pacific Dream And The Attractiveness Of Chinese Stocks
Dr Chan Yan Chong, Perspective | 14 November 2014
By: Dr Chan Yan Chong
Articles (200) Profile

With Japan introducing quantitative easing (QE), the yen suffered a drubbing while stock markets around the world went on a rally. I mentioned before that many years ago the Japanese economy started sliding from a high, primarily due to the strong yen that made Japanese products uncompetitive price-wise. That is why Abe’s decision in 2013 to allow the yen to devalue was a right one. The current exchange rate of US$1 to JPY112 is still not favourable; ideally, the rate should be around JPY150. If the yen reaches this level, the Japanese economy will be able to recover and exports will increase dramatically.

A weak yen will make some yen-related stocks very attractive, but there is one big issue that importers of Japanese goods face: the devaluation of their existing stock of goods. If the yen continues to weaken, these imports will also continue to devalue, so those of you looking to invest in yen-related stocks should exercise caution.

The US has finally exited QE, but a rate hike is still nowhere in sight. As a result, Wall Street has scaled a new historical high once again. Earlier this year, the 2,000-point level in the Shanghai Composite Index (SHCOMP) behaved like a magical trampoline that deflected any attempt to breach its bottom. The A-shares have finally bottomed out after falling for five years straight, mainly because the People’s Bank of China has been engaged in opposing policies with the US over this time. As the US continued to ease their monetary policies, China kept tightening its own. Now that the US has started tightening, China will start easing.

President Xi Jinping is slowly but surely realising his China Dream. On the back of its growing economic clout, China took the lead recently to gather 21 Asian countries to sign a treaty to set up the Asian Infrastructure Investment Bank, in which China holds a 50 percent stake. In other words, China is now funding infrastructure building in Asian countries. With China footing the bill, Chinese infrastructure companies can look forward to more business opportunities in the near future. Investors should keep a look out for good buys in the rail, cement and construction stocks.

This year, Xi’s dream expanded into an Asia-Pacific Dream. At the recent APEC meeting, Xi revealed that the way to realising this dream is to set up a new Silk Road, which includes land and sea trade routes. This is the reason steel-related stocks became hot favourites after his speech, as with many resource-related stocks. Despite the Mexican government cancelling its contract, share price of China Railway Construction Corporation (1186) surged, while stocks in the same sector like China Railway Group (0390) and China Communications Construction (1800) have fared well too. The potential of the Asia-Pacific Dream is one that deserves interest.

When Chief Executive of the Hong Kong SAR Leung Chun-ying went to Beijing, he came back with a hefty present – news that the stock connect scheme is starting on 17 November. The focus of the scheme, as well as its biggest beneficiary, is of course the Hong Kong Exchange (HKEx, 0388). In 2007, after news of the “through-train” direct link between Hong Kong and Shanghai bourses first floated, HKEx’s share price rose to HK$268.60; even though the proposal failed to materialise, HKEx’s share price then was still far higher than its current level. For this reason, I believe there is still a lot of headroom for HKEx.

The Straits Times Index (STI) finally bottomed out in mid-October. The impetus for the uptick came from Wall Street, which has seen another record high. Pity, though, that the STI could not even challenge its highest level this year. In the past, when the US market performed better than Singapore’s, investors would say that it was the Chinese stock market that is holding the STI back. Indeed, over the past six years, the Chinese stock market performed poorly, weighing down on the local bourse. However, now that the SHCOMP stands at 25 percent higher than this year’s lowest level, there are strong signs of a new round of bull run.

Why then is the Singapore stock market’s performance so lacklustre? Obviously the problems lie with Singapore, but what are they?

The first problem is the slowdown of the Singapore economy. Since the riot in Little India last year, the Singapore government started curbing the number of foreign workers. The industrial and commercial sectors were not able to cope with the sudden rise in wage costs due to the tightened foreign labour market, and have thus held back on other investments. On the other hand, the European recession has dented Singapore’s exports to some extent. Sliding oil prices have also impacted Singapore’s refinery and oil rig industries.

The second problem is a strengthening greenback that prompted a flow-back of hot money out of Singapore back to the US. Over the past few years, QE measures in the US had generated a massive amount of hot money, some of which had flowed into the Singapore stock market. Now that QE3 is over, and with no sign of a rate hike, these funds have flowed away. Historically, over the past few decades, a strong US currency usually translated to pressure on the Singapore stock market.

The third problem is the effect of the property cooling measures put in place over the past few years that is being felt keenly now. Property prices, both private and public, have fallen. Property stocks are bearing the brunt of this effect. Since a large portion of the STI stocks are property counters, it stands to reason that the STI will be under pressure.

The current transacted prices of HDB flats from the open market have fallen to a new low since January 2012. Yet the Singapore government has not shown any intention to withdraw or relax any of its cooling measures. The question is: with property prices in Hong Kong stubbornly staying at historical high levels, why had the same cooling measures worked in Singapore but not Hong Kong? One reason is that the Singapore government had made available a generous supply of land for HDB flats and private residence development as it introduced the various stamp duties, whereas Hong Kong could not do likewise due to political issues. Another reason is the tightened immigration and foreign labour policies and falling population growth rate in Singapore, lowering demand for housing.

Nevertheless, the problems stated above caused the Singapore stock market to put up a dull performance in comparison to the US and China markets. So long as these two economic powerhouses continue to perform well, Singapore’s stock market still looks good in the long-run.

For the moment, the Chinese stock market is still more attractive. After a six-year-long slide, the Chinese stock market has finally bottomed out. The next phase is a long period of gradual rise. This presents a new major bull market, so investors can consider buying Chinese stocks now, either directly from the Chinese stock market or higher-valued Chinese stocks listed in Singapore. Remember, when shopping for Singapore-listed Chinese stocks, go for those with high market value; avoid private non state-owned company stocks with low market value, as they are very risky bets.

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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