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Dr Chan: Bull Run Isn’t Over, Time For Blue Chips
By: Dr Chan Yan Chong
Articles (200) Profile

Bull Run Isn’t Over

Janet Yellen, Chairwoman of the US Federal Reserve, recently spent two consecutive days explaining the US Federal Reserve’s policies to the US Congress. Though she continued to be ambiguous, the market reacted positively.

The Dow Jones Industrial Average went on to hit a record high. The market does not expect her to call for a rate hike in the next two Fed meetings.

It is very likely that even Yellen herself does not know when she can raise interest rates and will rely on a wide range of economic data indicators to settle on a decision.

When it was revealed on 6 March that the US unemployment rate had fallen to 5.5 percent in February, the US stock market fell as this figure was far below market expectations.

Based on my observations, for the past two years, each new high achieved by the Dow was slightly higher than its previous peaks. Yet within a month, the Dow would then correct downwards by close to a thousand points.

US Market To Bounce Back

The fear of a rate hike is so deeply entrenched in investors’ mind that it unfolds and manifests itself in the stock market at every opportunity.

In the past, I have repeatedly pointed out that the US stock market will not be able to stay at its peaks for long; it will go into a moderate correction every time a new record high is hit. However, the bull market is not over.

Thus, after a period of correction, the US market will go on to reach another new high. Generally, the US stock market performance affects sentiments around the world, including the Singapore and Hong Kong stock markets.

Bargain Hunting: SG & HK Stock Picks

At this stage, it is a good time for some bargain hunting, and your eyes should be set on those blue chips that have been hitting new highs over the past year. For people interested in Singapore shares, they can refer to the list of stocks in the “Hitting 52-Week High” section of Shares Investment.

For Hong Kong shares, one can consider AIA Group (1299), Tencent Holdings (0700), CLP Holdings (0002), Power Assets Holdings (0006), Henderson Land Development Co (0012), Hutchison Whampoa (0013), MTR Corporation (0066), China Merchants Holdings (International) Co (0144) and China Life Insurance Co (2628).

At which point during the market’s correction can one start bargain hunting? There is no fixed point per se, considering the market is still trending upwards.

Over the past one year, every major correction has been contained within a ten percent range, usually between six percent and nine percent, which should be a suitable range of correction for bargain hunting.

China’s 2015 Outlook

At the opening of this year’s National People’s Congress (NPC), Premier Li Keqiang kicked off his work report with the state of the economy and set a growth target of 7 percent for 2015, lower than previous rates. The market has since taken this growth target to cast a pessimistic outlook.

However, I am still optimistic, for if China can achieve 7 percent growth in its gross domestic product (GDP), the growth rate of the average earnings of listed companies should too be not be less than 7 percent.

Currently, the price-to-earning (PE) ratios of heavyweight counters within the Shanghai Composite Index (SHCOMP) are not high, and the PE ratios of the H-shares of these same companies are even lower, thus limiting the risk of falling share prices.

The fact that China’s economy is no longer growing at hyper speed has become part of the new norm; with China at the upper limits of achieving economies of scale, it is no longer possible to achieve an annual growth rate of 10 percent or more like how it did in the past.

NPC Report

In his report, Premier Li touched on policies that are already well known, and there was nothing new to be excited over. For this reason, the slide in A-shares, H-shares and Hong Kong shares is to be expected.

However, third- and fourth-tier Hong Kong shares have been actively traded in recent days, indicating that the market is flushed with so much money that investors are looking for avenues for some short-term profit.

Premier Li mentioned about environmental protection and setting carbon dioxide emission reduction targets in his report, which inspired punters to go after selected photovoltaic company stocks and clean energy stocks.

However, such shares are good only for near-term investments. Every year when the National People’s Congress (NPC) session is convened, speculators will take this opportunity to speculate based on the agenda, but interests would also die out rather quickly.

Those who chased after such speculative stocks and bought in at high prices are likely to be stuck when interests fizzled out, and they will have to wait until the next NPC meeting, when speculators begin punting on policy-related stocks again, before they have a chance to exit their positions.

SHCOMP

Before the Shanghai-Hong Kong Stock Connect Scheme went live, the prices of many Chinese banks that trade on the Shanghai Composite Index (SHCOMP) were lower than that of their H-shares counterparts. After the scheme went live, these A-shares rose rapidly.

Recently, however, they have met with resistance, and some would say it was due to worries over competition from private banks. I am not worried about competition from the private banks, because so far, the only two privately funded bank startups that are able to take on large state-owned banks are Tencent and Alibaba.

The shortcut to starting a privately funded bank is through outright acquisition or becoming a major shareholder. Therefore, apart from the four state-owned banks, all the listed heartland Chinese banks may become the target of future acquisitions and buy-ins.

Those who have money to spare and are patient enough can consider buying such shares and bid their time. HSBC Holdings (0005), which holds a 19.9 percent ​​stake in the Bank of Communications (3328), is one such example of an anticipatory investment.

Manufacturers Shying From China

Rumours has it that a number of Japanese companies such as Panasonic Corporation, Daikin, Sharp and TDK are planning to move their Chinese manufacturing base back to Japan. If this is true, Abe’s strategy to allow the yen to devalue would prove to be successful.

China’s cost of manufacturing is increasing, and the withdrawal of foreign capital is an immutable fact now, unless the Chinese yuan depreciates sharply like the yen.

How can this shrinking space in the manufacturing sector be filled? It seems that the only way out is for the Chinese government to cough up the money and engage in infrastructure building, while creating an asset bubble to boost consumption. This may be the investment direction that Chinese A- and H-shares will take in the next one to two years.

Asian Properties Landscape

In recent years, prices of mass-market properties in Hong Kong have risen sharply, and almost all the buyers are first-time homeowners. They are the driving force behind the soaring mass-market property prices, and that has led the government to come up with cooling measures targeted at them.

If the measure to impose a lower mortgage amount is still not sufficient, the government will not rule out the possibility of doubling the stamp duties for first-time buyers, and that will surely put the brakes on.

Today, there are still some Singaporeans who complain about high property prices, but in contrast, the living conditions in Singapore is the envy of the majority of the people in Hong Kong. Of course, those who do not own a property will blame the government for not controlling prices, while property owners will stand to gain from rising prices.

Property prices in Singapore have been brought under control over the past year, and we are even seeing a slight decline. In contrast, property prices are still rising sharply in Hong Kong.

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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