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Hu Li Yang: Be Wary When Indices Hit Historical Highs
Aspire, Thought Leaders | 13 May 2015
By: Vance Wong
Articles (74) Profile

Hailed as “the guru of Wall Street”, Hu Li Yang is a popular investment and finance expert among the Chinese from all over the world. In a recent interview, he shared his view about the different indices in the Asia Pacific (APAC) and if the bull run will continue through 2015.

1. In view of the Straits Times Index (STI) hitting its seven-year high, how do you think the index will fare this year? Will the bull run continue or will there be a steep correction? Why do you think so?

STI as at 12/05/2015; Source: FactSet Fundamentals

I have discovered that there’s more often than not a special pattern that occurs in the performance of the STI and other major indices in the world. The STI has a historical average of 3,000 and that should be a benchmark for all investors to take note of. When the STI hits 15 percent above its historical average, which is 3,450, it should be a point where people should start to be wary.

This is where the market prices might be overpriced but I do not think that it will necessarily crash. However, the market’s growth rate will definitely slow down, unless the economy is doing exceptionally well to justify a continuation of the bull run.

As such, I do not think that the STI bull run will continue beyond 3,500, judging from historical standards. The current risk to reward ratio in the Singapore market is too unfavourable for any sort of big positions. My view will only change if the global Gross Domestic Product growth sees a breakthrough, until then, my only advice is to buy low, sell high.

2. Despite a few blue chip companies not performing, there are some small/mid-cap stocks that are performing exceptionally well, what do you think is the reason for this?

It’s very normal for this to happen, especially when the market is in what most investors might know it as the “second phase of a bull run.” Blue chips generally appreciate visibly in the first phase because that is where investors’ attention would be focused on first.

In the second phase, because most investors would already have positions in blue chips, people would start to look at penny or mid stocks to buy into. As such, it is natural for mid caps and pennies to perform a lot better as compared to the blue chips during this phase.

I would to stress again that there is always a limit to how long a bull run can last. This is  especially when nothing out of the norm happens to stimulate the economy further.

3. Many investors feel that the upcoming Shenzhen-HK Stock Connect will cause southbound money to surge even more, what is your view on this? Why do you think the connect will be good for China and Hong Kong?

SHCOMP as at 12/05/2015; Source: FactSet Fundamentals

Let me put it this way, it does not matter if it is Shenzhen-HK or Shanghai-HK connects, any sort of connects will be good for the economies involved. What any stock market needs is for capital to flow freely. The stock connect works like a pipe that allows more capital to flow between markets easily.

However, one must still be wary of the stock markets reaching a point where valuations are on the dangerously high side. There is definitely a limit to any bull run in any market and I feel that when the Shanghai Composite Index (SHCOMP) reaches approximately 4,255, everyone should start to be cautious.

Recently, when the SHCOMP was near the 4,500 mark, I was a little worried but it quickly declined below 4,255. In my opinion, investors can look to buy into A-shares if the SHCOMP is about 3,700. At that level, it would be a very good and safe position to get in the market.

4. With the H-shares surging forward, what is your advice to investors that are interested to invest in HSI?

HSI as at 12/05/2015; Source: FactSet Fundamentals

The Hang Seng Index (HSI) is at a point where the valuations are starting to get high so I would suggest not to invest for the long-term. In the current situation, one should be cautious when entering and be ready to get out as soon as the market seems to be declining.

The HSI is only attractive for long-term investments during the first phase of a bull run. Since the HSI is now near its high, investors should focus more on the short-term outlook of stocks that they buy into.

Furthermore, with the impending interest rate hike by the US Federal Reserve, investors must understand that the following few years will be rather bearish. Therefore, investors should remember that cash will be of utmost importance during that period.

5. Looking to the west, the US Dollar is facing some difficulties about core inflation rates due to reduced spending. Do you think the US Federal Reserve will postpone the interest rate hike? When do you see them increasing interest rates?

After Janet Yellen, chairwoman of the US Federal Reserve mentioned about the housing and stock markets being slightly overpriced at the moment, I have a hunch that the interest rates will either rise by September this year.

More importantly, if the interest rates are raised too high and too fast, it will be detrimental to the entire global economy. Therefore, I personally feel that all investors should not be overly panicky or greedy to sell their positions or dive into the market without proper consideration.

This is because the risk to reward ratio is currently very unfavourable for any sort of investment or trade.

Hu Li Yang will be speaking at Shares Investment’s upcoming MYR 2015 event. Details of that event can be found here.

Click here to buy Hu Li Yang’s book 《胡立阳股票投资百宝箱》!
Click here for a special promotion price of a bundle including the Shares Investment Conference Ticket (full-day access) and Dr Chan Yan Chong‘s book 《机不可失—沪港通航的越界机遇》!
With a Communications background, Vance has the passion to write with a purpose - to provide content supported with substantial evidence to vested readers.

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