HK Market Strategy Commentary:Replay of 97-98Financial Crisis This Time is Different!
Concerns of imminent US Fed rate hike and China’s hard landing, increasing pressure of funds outflow in emerging markets. As a highly open and free economic system, Hong Kong will not be immune to the ripple effects from the surrounding regions under the integrated global economic and financial markets. Funds outflow in the emerging markets will exert certain pressure upon HK, albeit a small amount of funds inflow was seen in the daily quota of Shanghai-HK Stock Connect. The sudden devaluation of RMB and weaker-than-expected Caixin PMI figures released last Friday strengthened the market’s pessimism once again. This round of global turmoil was mainly caused by market panic and the lack of confidence. In the near term, HK stocks will be more likely to fall in view of fundamentals and capital flows.
Mainland macroeconomic policy caught in a dilemma, progress of capital projects including Shenzhen-HK Stock Connect and QDII2 may delay. As the continued devaluation of RMB and the increased intensity of monetary easing will exacerbate funds outflow, one can only rely on open market intervention temporarily to stabilize the exchange rate, which may eventually lead to the continuous fiscal stimulus and selective monetary easing policies.
Replay of 97-98 Asian Financial Crisis? The key is to observe HKD exchange rate (including the aggregate balance of banks) and Interbank Offered Rate HIBOR). Once the former significantly weakens to the level of weak-side convertibility undertaking (7.85), the aggregate balance of banks will suddenly drop while interest rates will surge, then the tightening of liquidity may be further extended to the real estate market, financial system and the wider real economy, hence evolving into a full-fledged financial and economic crisis. Given the moderate US rate hike, China’s fiscal deficits and foreign debts under control with adequate foreign exchange reserve, the more conservative HK real estate mortgage policy than in 97-98 as well as the more flexible exchange rate mechanism of Asian economies, it is unlikely to repeat 97-98 Asian Financial Crisis, though the possibility of severe financial and economic crises in individual economies could not be ruled out.
Panic selling emerges again, HSI downside target 18,000-20,000. As the valuation of HK stocks is still some distance away from the bottom of 6.62x in 1997 and with around 10% downside to the bottom of 9.41x in 2014, the market bottoming out is expected to last for 1-2 weeks while more sustainable rally would need to wait till the announcement of US Fed rate hike results on September 17. Taking reference from the Financial Crisis in 97-98, the downside target range of HSI is expected to be 18,000-20,000 with hopes of stabilizing and rally, but not to be overly optimistic and it would be very difficult for HSI to reach 25,000 again by the year end.
Recommendation: survive panic selling stage, moderately underweight, optimize positions, and await buying opportunitiesIn the midst of market panic selling stage, many stocks have already been oversold, hence better not follow the trend of selling. We recommend moderately underweight on stocks with relatively higher valuation, increasing cash holdings, optimizing the structure of positions, and awaiting buying opportunities for rebound. Yet, one must unload small caps with poor risk-resisting capability and low liquidity asap.
