The Hang Seng Index in Hong Kong slumped 2.5% to 19,370 Tuesday on moderate turnover, and the index of Chinese companies sank 3.1% to 10,184.
But the setback is only temporary, according to Peter So, managing director and co-head of the research division at CCB International Securities. “The Hang Seng Index has gone from 16,100 to more than 20,000 in two weeks,” he told Equities. “It became overbought, and there will be some consolidation.”
The main reason for the recent surge in Hong Kong and other global markets was growing optimism Europe would solve its debt crisis. CCB International’s position in its Weekly Economics Watch was that ballyhooed “comprehensive” solution presented last week was more of a band aid than the major operation needed to stop the bleeding.
However, So said that Europe’s willingness to address the issue seriously gives investors more confidence to move out of safe havens and into riskier investments.
Some of those investments will be in large companies with solid balance sheets in emerging Asian markets, he said. “More investors are interested in emerging markets because they were oversold from June to October,” So said.
China looks attractive because most large companies have reported strong third quarter earnings. In addition, So said, China last week signaled its intention to slightly loosen tight credit policies in coming months.
Initial interest is in blue chips because they are liquid and have strong balance sheets, he said. The second wave of buying will target cyclical stocks like cement producers, banks and some commodities. CCB International is the brokerage arm of China Construction Bank, one of China’s “Big Four” banks.
So pointed out that giant Chinese bank ICBC (FXI) has a rock-bottom projected 2012 PE of 7X. Among commodities, he likes Jiangxi Copper (JIXAY). End
Hong Kong Blue Chips: -495, -2.5%, to 19,370, 11-01-11, Hang Seng Index
Chinese Stocks in Hong Kong: -329, -3.1% to 10,184, 11-01-11, HSCE Index
Shanghai Stocks: +0.07%, 2,470, 11-01-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -9.7, to 382.0, 10-31-11, Bank of New York Mellon, ADR Index-China
Insight: A big drop on Wall Street added impetus to Hong Kong's pullback from recent sharp gains. Investors are advised to accumulate China plays during downturns because of better prospects for an easing of China's tight credit policies. KGI Research
Quotable: "We believe Hong Kong’s stock market may enter into a consolidation phase in near term after a strong rally in October. We do not expect the Hang Seng Index to surpass 20,500 this month. Shortterm investors should take profit on Chinese stocks including shipping, steel, automobile and property developers." Guoco Capital. 11-01-11
Chinese Company to Watch: Tiangong International (1626.HK) "Given its leading position in new materials industry, one of the key strategic emerging industries receiving support from the country’s policy, the company is undervalued, in our view, trading at 2011/2012 P/E of 5.4x/3.6x. “Buy” reiterated with TP of HK$3.6." BOCOM International. 11-1-11
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For a list of Chinese companies sold in the U.S. and information on each company go to http://www.adrbnymellon.com/dr_country_profile.jsp?country=CN
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