Uncertainty rules short-term China stock movements in Hong Kong. The main sources, according to KGI Asia chief operating officer Ben Kwong, are the European debt crisis and prospects for further stimulus for the sagging U.S. economy.
The European crisis flared early in the week when it appeared it would spread to Italy, one of the continent’s largest economies. The Hong Kong market initially plunged in response. U.S. stimulus seemed imminent at mid-week due to Federal Reserve chief Ben Bernanke’s comments about a third round of quantitative easing, the so-called QE3. But the next day Bernanke said, in effect, “Not so fast,” and prospects dimmed.
As a result of uncertainty, Kwong said, “Overall, sentiment is very cautious.”
Because of huge losses after Italy’s debt problems emerged, the Hong Kong blue-chip Hang Seng Index lost 3.7% for the week, falling 851 points to 21,875. The index of Chinese Companies sank 3.8%, 490 points, to 12,266.
One uncertainty that did not have a big effect on the market was the issue of raising the U.S. debt ceiling. Like many U.S. observers, Kwong is not overly fearful the U.S. will default on its debt for one simple reason: It’s unthinkable. “Maybe near the deadline Congress will find a solution, some sort of compromise to prevent default,” he said.
One effect of uncertainty is to push investors into fast-growth stocks like Chinese cement producers, which recently issued predictions of growing profits. Luxury fashion plays are another fast-mover. Investors think these stocks are safe because their rapid growth will sustain share prices and dividends, Kwong said.
Meanwhile, investors shy away for a large pool of “value-based” stocks, according to Kwong, stocks that have not had sexy news stories about surging profits but have solid growth and attractive P/E levels.
Among these stocks are Chinese banks, shipping container and port terminal companies and some consumption plays. Kwong singled out China Merchant Holdings, a port operator with huge investments in Shanghai, Tianjin and other Mainland cities.
But he cautioned, “It’s too early to jump on the bandwagon now.” Value-based stocks will probably continue to struggle for the short term.
Something that could ignite a surge in China Merchant’s stocks would be a firm U.S. decision to launch QE3, Kwong said. That’s because the decision would boost world trade and port activity. But Kwong doesn’t expect such a move until the weak U.S. economy forces Bernanke’s hand, possibly in September. End
DAILY FIX — No QE3, No Gains
Hong Kong Blue Chips: -65, -0.3%, to 21,875, 07-15-11, Hang Seng Index
Chinese Stocks in Hong Kong: -61, -0.5% to 12,266, 07-15-11, HSCE Index
Shanghai Stocks: +0.4%, 2,820, 07-15-11, Shanghai Composite Index.
Chinese Stocks in the U.S.: -3.2 to 430.8, 07-14-11, Bank of New York Mellon, ADR Index-China
Insight: Dimming prospects for a third round of quantitative easing (QE3) by the U.S. Federal Reserve helped push the Hong Kong market lower in thin trading. KGI Research
Quotable: “In light of an increasing (Chinese) investment, consumption and industrial efficiency, the worries for a serious economic slowdown in the second half of the year can be dispelled.” CFSG. 7-14-2011
Chinese Company to Watch: “BOCHK remains one of our top picks within the Hong Kong banking sector, given that its low loan/deposit ratio of 63% helps to protect the group from rising funding costs while its strong core capital ratio of 11.3% ensures that the currently attractive dividend yield exceeding 4% can be maintained in the near term.” Haitong Securities. 7-14-2011
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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
