HK/China market update 中港股市月報(Nov 30)

Share with you the market update on HK/China brought to you by BASE Asset Management Company Limited in English, Traditional Chinese.
Market Update 
In the last month, we saw a huge divergence between China and Hong Kong market, with China A-shares hit the new record yearly high (up 11%) but Hang Seng Index fell (HSI) into a range trading pattern with no gain at all (0%). This kind of market performance is fully matched with our previous forecast that A-shares market would continue to outperform HSI and our strategy of putting high weighting on the A-shares ETFs since July proved to be right also. 

We believe most of our clients can still recall that we are one of the few to buildup abullishview on China since April even though the market sentiment was extremely poor at that time in afraid of the burstof China’s trust product bubble. In our April’s report, we stated: 

“Although this restructuring process might take a longer time to see the success, we still don’t expect a hard landing or national financial collapse in China in the near term. We believe investors are overly bearish on China at this moment. Sooner or later, we believe investors will regain some confidence and re-rate China in the coming future”.

Now, in about six-month time, we really see both China domestic and foreign investors are starting to regain confidence in China. Since April to November, China’s A-shares were up almost 40%, H-shares went up 14%, and HSI went up 8%. This outcome does refresh my memory on a famous quote from Warren Buffett: “Be Fearful when Others are Greedy & Be Greedy when Others are Fearful”. We admire this quote and we are not just applying this philosophy on our stock selection level but also on the asset allocation level.

Going forward, we don’t have anything to change on our bullish fundamental view on the overall China and we expect the equity markets will continue to be rerate upward gradually. However, in terms of individual index performance within the China and HK region, we might see divergence between different indexes. In the longer term, we believe both A-shares (possible some minor corrections in short to medium term) and H-shares will continue to outperform the Hang Seng Index as the former two indexes are highly leveraged on China’s positive structural reforms while Hang Seng Index will be dragged by the HK domestic companies with slowing growth momentum. 

Recently, many people gave a reason for the sharp rebound of the A-share markets was mainly due to the cutting of the interest rates in China. However, we think in the opposite way that the above argument is to put the cart before the horse. Indeed, we believe the reason for the cutting of the interest rates was mainly for the purpose of pushing up the A-share markets. Why? It is because there are some strategic objectives for the A-shares to go higher. Firstly, central government would like to encourage corporates to get financing through the equity market instead of heavily relying on the bank and debt financing; Secondly, in order to attract more than US$300 billion going into China shares through the inclusion of Chinese stocks into the MSCI index next year, they have to burn up the A-shares markets so as to make the Shanghai-HK stock connect scheme to be successful. Last but the most important point is to create the wealth effect so as to stimulate the domestic spending in order to offset the negative economic impacts from the depressing property markets. If our thinking is true, we cannot rule out that we might see a sustainable bumpy rally in the China’s A-shares markets. 

Even though our call in China remains bullish, we still cannot neglect the global systematic risk level. After China decided to start the rates cut cycle and stop using the reverse repo operation to drain the excess liquidity in the system recently, we believe 2015 could be a growth supporting year for China and that could moderate easing the global systematic risk level in some extent. Apart from that, we start to see some signs showing the US$ might weaken soon and that will ease the threat from the unwinding of US$ funded carry trades and massive liquidity outflow from Asia. For example, the Fed vice chairman, Stanley Fisher (an influential man within the Fed and being the mentor of ex-chairman Bernanke and ECB President Draghi) said in days ago that the Fed might leave rates unchanged next year if there is low inflation (oil price already drops 40% from the peak). In addition, ECB president Draghi seems to face opposition and insufficient support from the Board for implementing the QE program. We believe all those signals might ease the continuous upward pressure on the US$ in the short to medium term. Having said that, the risk level drops moderately doesn’t mean it’s gone. We still believe a long term rising trend of the US$ is still possible and the recent sharp increase in the Russia’s sovereign debts CDS to three-year’s high level did raise our concern on the debt default risk in Russia. As such, we won’t keep raising cash further as planned but intents to hold the cash at current level of around 20%-25%. 






會有機會呈現短暫弱勢,這將舒緩由美元融資套利交易拆倉和大量資金流出亞洲的威脅。這些跡象包括:i)美聯儲局副主席,斯坦利費舍爾(他是一個在美聯儲局內非常有影響力的人,並且是前主席伯南克和歐洲央行行長德拉吉的導師)在幾天前表示,在低通脹(石油價格已經從高位下降40%)的環境下,美聯儲局可能在明年仍維持利率不變;ii) 此外,歐洲央行行長德拉吉在歐央行內對其實施量化寬鬆政策似乎面對很大反對聲音和不能得到足夠的支持。我們相信,所有這些信號可能會緩解短期至中期內對美元持續升值的壓力。說了這麼多,盡管全球系統性風險水平適度的緩和,並不意味著全部已消退了。我們仍然相信長期的美元上升趨勢風險仍是可能的,加上近期俄羅斯的主權債務CDS升至三年高位,這使我們更加需要關注俄羅斯的債務違約風險。因此,我們雖然不會按計劃再增持現金至更高水平,但仍然會維持現有水平大約為20%-25%。

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