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A-H Divergence Continues; Trade Directly In A-Shares
By: Dr Chan Yan Chong
Articles (200) Profile

The terrorist attacks in Paris stunned the world. Terrorist attacks are usually supported by elements from within the victim country. According to news reports, the perpetrators of this atrocity included French nationals born and bred in France. Why did these people become extremists?

French people are strong advocates of freedom and liberalism. Freedom is supposed to be an ideal that all human beings are entitled to. Sometimes, however, freedom degenerates into malicious attacks on religion and racial equality. These attacks give rise to radical ideologies, and thus extremism is born.

For social harmony to prevail and extremism held at bay, one very important condition is that the society must enjoy sufficiency and the people must be able to live a stable life. The more turbulent a society, the more impoverished the people, the more likely the existence of extremism ideals. These radical ideas often resort to extreme measures to transform society in accordance to their ideals.

Market Believes IMF Recognises Yuan As SDR, A-Shares & Yuan Surge

The terrorist attacks on Paris led to stock markets opening lower across the Asia-Pacific, though the Chinese A-shares managed to close higher. Some people believed that the Chinese government was shoring up the market as well as the Chinese yuan, resulting in a surge in offshore yuan prices. Others believed that the International Monetary Fund (IMF) has in effect recognised the yuan as a special drawing rights (SDR) currency, so they jumped in to buy up the yuan as well as A-shares.

Looking at the current situation, the yuan’s inclusion in the SDR basket seems like a foregone conclusion. That said, this does not mean that the yuan will appreciate significantly in the future. Currently, the SDR currencies recognised by the IMF are the US dollar, euro, pound sterling and Japanese yen. However, most foreign trades are still transacted using US dollar as the main currency.

Becoming part of the SDR only means that the yuan constitutes part of the foreign exchange reserve in some countries, but it does not sufficiently incentivise any two countries that are not related to China to use the yuan as their trade settlement currency. The yuan has still a very long way from becoming an international trade settlement currency.

Fed Might Postpone Hike Further After Paris Attack

The Paris terrorist attack has given the US Federal Reserve another good reason not to raise interest rates. At the recent G20 meeting in Turkey, all participating countries pledged to stimulate global economic development. As the US has pledged similarly, it will not risk an interest rate hike now. Therefore, the US stock market rallied despite the terrorist attacks in Paris. There are still some positive factors motivating the stock market, so we will have to wait until the morning of 17 December to know if the US will raise interest rates. In the meantime, the stock market will probably move within a narrow band.

US stocks fell sharply in August over concerns about a rate hike in September. Eventually, when the rate hike did not happen, Wall Street rebounded, with the Dow Jones Industrial Average climbing to just two percent off a new record high. No matter how hard the market tried, this last two percent proved elusive, and subsequently Wall Street went into a correction. It was not until after the terrorist attacks in Paris that the market rallied suddenly.

As the Fed interest rates meeting in December approaches, the pressures of a rate hike will resurface. If Wall Street hits a new high, it would suggest that international investors have digested the possible impact of a US rate hike. Once the market is no longer worried about interest rates, the resistance to an upward thrust will disappear. It is still not too late to buy in then; until then, the shadow of a rate hike remains a huge resistance on the stock market.

Pick Market Leaders For Internet Shares

11 November was China’s Singles’ Day, a festival popularised by Alibaba Group to encourage spending. According to Alibaba’s report, China’s total spending during Singles’ Day has outpaced US’s spending during Thanksgiving last year, proving that China’s consumer market is indeed the biggest in the world, a fact that US will never forget even as it seeks to contain China.

Today, online shopping competes directly with shopping malls for business, while online media and advertising are also fighting for a bigger slice of the advertising pie with traditional print and TV media. However, as online shopping and online media become more popular, there is an increased chance for monopolies to emerge, squeezing out small players.

Therefore, when choosing internet shares to invest in, always look for market leaders. The only way second and third-tier internet stocks can hope to survive is to wait for leading websites to buy them out. Do note also that online businesses are more creative and can move faster than traditional media, so the status of market leadership can be lost at any time.

Investors’ Takeaway: A-shares Attractive Now As A- & H- Shares Diverge

Each time the stock market crashed, China’s Securities Regulatory Commission (CSRC) would put a hold on initial public offerings until the market recovered, and each recovery would bring about a fresh round of pressure on the market. During the recent market crash, the Central Commission for Discipline Inspection probed deeply into the financial sector, which resulted in the sacking of senior officials from even within the CSRC itself. We hope that there will be lesser insider trading and policies will be more transparent after this clean-up.

Recently, the Shanghai Composite Index has risen at a rate comparable with that of the Shenzhen Stock Exchange Component Index. So basically, it does not matter now whether the proposed Shenzhen-Hong Kong Stock Connect scheme will be launched soon; what the market is more interested in is when the A-shares market will pick up again.

This time round, foreign investors have misjudged badly when they pulled out en masse from the Chinese A-shares market and H-shares in Hong Kong. The A- and H-shares markets continue to either diverge or rise at vastly different rates. On 9 November, China CITIC Bank Corporation’s A-share rose 10 percent, whereas its H-share rose only 1.7 percent. So it seems that if we decide to invest by moving with the flow, we should trade directly in individual A-shares.

At the historic meeting between Xi Jinping and Ma Ying-jeou, President Xi spoke only about a peaceful development across the strait without mentioning about reuniting with Taiwan. This is truly a grand gesture of goodwill. Xi understands that China and Taiwan will not be unified in the foreseeable future, so he decided to stop the empty rhetorics of reunification so that both sides can move ahead more peacefully.

The so-called pro-independence elements in Taiwan are merely mouthing empty words about independence. Over the eight years when Chen Shui-bian was in office, one million Taiwanese ventured into the mainland to seek out business opportunities. Chen’s so-called pro-independence push was just a tool to win him votes.

The reality is that both sides will maintain status quo, neither reunifying nor gaining independence. Of course, at China’s pace of economic development today, the Taiwanese economy has to rely on the mainland, and this is a trend that looks unlikely to change.

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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