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Bull Run Can Be Further Capitalised
By: Dr Chan Yan Chong
Articles (200) Profile

The US Federal Reserve (Fed) generally meets once every two months to discuss and determine the US federal funds rate.

The next meeting is scheduled on June 17th and 18th, and these will be important dates to watch out for. The federal funds rate is the interbank overnight lending rate.

In the United States, such short-term rates are determined by the Federal Reserve Board, while the mid-and long-term rates are decided by the market.

After the financial crisis of 2008, the Fed had been trimming interest rates, so much so that it had stood at zero percent for a while now. After maintaining rates at this super-low level for the past years, the American economy finally showed some signs of recovery lately.

US Rate Hikes To Come Very Soon

One determinant of the long-term, ultra-low interest rate was a depreciating US dollar. For the US to maintain its position as the most powerful nation in the world, the US government needed to print more money to spend.

One of the most important reason why this method works is that people around the world welcomed the greenback. This is why the dollar cannot be allowed to depreciate indefinitely.

For this reason, the Fed had to keep reminding the world of its intention for a rate hike in order to sustain the exchange rate of the US dollar, even though it has not raised interest rates for the currency in the last two years.

Two years on, the rate hike warning has become something of a ‘boy who cried wolf’ scenario. Wall Street has been hitting record highs over the past two years on the back of the “crying wolf” situation.

However, each time a new high was reached, the spectre of an impending rate hike would loom, sending the stock market into a correction.

In its latest post-meeting statement, the Fed indicated that if inflation rate hits two percent coupled with job market improvements, they will then raise interest rates. The market reacted by causing the US dollar to pummel from a high.

Now, the market is expecting the “wolf” to come for real and very soon. It may very well be in the post-meeting statement on June 17 that would be released in September. However, I think it will just be a “baby wolf” and will not cause much harm.

As the Hong Kong dollar is pegged to the US dollar, Hong Kong will follow in US’ footsteps when it does raise interest rates. The situation is a direct opposite for the Chinese yuan (RMB).

China Opposite of US

The RMB is going through a period of rate cuts, regardless of the situation on the other side of the Pacific, the People’s Bank of China will continue to lower interest rates to boost China’s economy. This could mean a steady stream of favourable news to the A-shares market.

The Chinese Academy of Social Science (CASS), which is effectively the think-tank of China’s State Council, published an article last year which predicted that the Shanghai Composite Index (SCI) will hit 5,000 points this year. In reality, I believe even the CASS could not foresee how quickly the SCI had hit the mark.

It is undeniable that the Chinese central government would like to see a bullish market. Over the past six months, the Chinese government had pulled out all stops – starting with the launch of the Shanghai-Hong Kong Direct Connect Scheme, followed by rate cuts and lowering the bank reserve ratio.

It then announced the Shenzhen-Hong Kong Connect Scheme, allowing mainland funds to buy shares in Hong Kong, the mutual recognition of mainland and Hong Kong funds – to give the stock market shots of boosters. Its motive could not get more obvious than this.

With such incentives, investors should not dally anymore but should instead boldly jump on board the soaring rocket.

However, there is a problem: once the rocket lifts off, does anyone have the ability to keep it locked on its projected trajectory, or is it allowed to drift freely in the boundless space?

Capitalise Bull Run While It Lasts

For now, we do not have to worry too much. More importantly, we need to capitalise on the Bull Run while it lasts. China’s central government is still betting on the stock market rising further, and will only tap the brakes occasionally to stop the bull from charging too fast.

We should therefore continue to stay in the market, and keep a good grip on our leverage ratio to avoid being forced out of the market due to our inability to cover our positions. We should keep our main focus on the blue chips, and not be envious of those who traded junk stocks for flashy sports cars.

For a while now, the Chinese government had been making stock market-friendly announcements over the weekend. This is why over the past few weeks, the stock markets in China, Hong Kong and Singapore would rise every Friday, with the exception of the last Friday in May, when the People’s Bank tightened money supply.

In other words, with the deluge of good news, the Chinese stock market is on a rampage, so much so that even the Chinese government is afraid that they may have an uncontrollable bull on their hands. They really just want the bull to run a bit slower, not kill it. So I believe the market will pick up again after some rest.

This has been the run-rest-run pattern of Chinese A-shares over the past six months. Therefore, the most important thing for investors now is not to be frightened away by the market and cut loss recklessly.

The British index company FTSE has included Chinese A-shares in its two newly established Emerging Markets Indices. A good index means it is good at picking out promising stocks, rises in the long term and yields significant appreciation ability.

Exchange Traded Funds (ETFs) based on such an index will see its component shares appreciate in market value. The Dow Jones, the Hang Seng and the Straits Times are some of the most prestigious indices currently.

As indices become well known and carry an expanding range of ETFs, the index company will make a lot of money, since each ETF are required to pay royalties to these index companies.

One Belt, One Road

When Chinese Premier Li Keqiang visited Brazil, he signed contracts for multi billion-dollar infrastructure projects with Brazil. Naturally, a number of Chinese railway and infrastructure stocks became hot favourites as a result.

However, infrastructure stocks linked to the ‘One Belt, One Road’ initiative have been heavily speculated on for some time now.

Compared to their respective highs, Hong Kong-listed China Communications Construction (1800), China Railway Engineering (0390), and China Railway Construction (1186) are currently traded at a 15-18% discount.

This shows that there is a sizeable number of high-chasing investors stuck with their ill-timed positions. It is these investors who caused each speculative rallies to be short-lived and subdued.

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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