Market Snapshot:Southbound trading track and market review

Laggards in, outperformers out The Hong Kong market rebounded slightly last weekon strength in the US market, which was supported by the Fed’s projection of furtherstrength in the US economy next year as well as market expectations of an imminentapproval of the US tax bill. Gaming, airlines, consumer staples, healthcare and banksoutperformed most, while the TMT, auto, insurance and materials sectorsunderperformed, showing a continued trend of picking laggards and switching out ofstrong performing sectors before the year-end. Among HSI constituent stocks, Tingyi (322HK, NR) and Galaxy Entertainment (27 HK, NR) rose the most, while Sunny Optical (2382HK, NR) and AAC Tech (2018 HK, NR) saw the biggest falls.

    Southbound funds buy more, sell less; full-year net buying may exceed HK$350bnAverage daily southbound trading turnover decreased by 17% WoW to HK$12.1bn lastweek, falling below the Nov average of HK$14.6bn; as a result, southbound trading’smarket share in the Hong Kong market fell to just 9.2% last Friday. However, southboundfunds have further increased their net buying, as daily average net buying increasedfurther by 28% WoW last week to HK$2,609m, back to the Nov average (HK$2,651m),showing that mainland investors have regained interest in the Hong Kong market after atemporary cool down due to the volatile market the week before. In fact, as of Nov totalnet buying from southbound funds has already exceeded HK$309bn, and with the currenttrend, total net buying in 2017 is likely to exceed HK$350bn, up 42% YoY.

    Banks back in favor In the Shanghai southbound connect, of the top-ten daily activestocks last week, ICBC (1398 HK, NR), Tencent (700 HK, NR), CCB (939 HK, NR) andChina Taiping (966 HK, NR) recorded net buying, indicating that banks are back in favor.

    In the Shenzhen southbound connect, Tencent, ZTE (763 HK, NR) and SMIC (981 HK,NR) recorded net buying, showing that Shenzhen investors continue to prefer tech stocks.

    Tax policy in focus; large banks to benefit from higher interbank rates The CentralEconomic Work Conference, which usually sets the tone for economic policy in the comingyear, will be held this week. Given the short interval between the conference and the 19thCPC National Congress, we believe the conference will stick with the National Congress’sspirit, meaning indirect financing, controlling financial risk, tax cuts and housing systemreform should be among the key issues addressed. Given the imminent US tax reform,which may set a trend of lowering the tax burden for companies and individuals, news ofany tax reduction plan from the conference will be closely monitored. Meanwhile, marketliquidity continues to be tight given the year-end effect and the US interest rate hike, whilethe 1-month HIBOR/SHIBOR have risen for three/two weeks respectively. We believe thistrend will continue to favor large banks with strong deposit bases, helping to furtherimprove their NIM; hence, we continue to favor banks in the short term.

    Risks Market unrest driven by geopolitical events and hurdles in US tax reform.