Catch-up play for second half

money-glitz | Kevin Xu 6 Jul 2020

Some investment houses are holding a bullish view of Hong Kong equities in the second half and short US dollar, on hopes of the economy reopening and a stimulus-backed rebound, but investors are reminded to stay cautious as uncertainties abound.

Citibank Hong Kong set a target of 28,226 points for the benchmark Hang Seng Index over the next 12 months, a 11.2 percent upside from its current level.

The bank also points out that the current valuation of the index is not expensive, as an investor only needs to pay around HK$11 for HK$1 of forecasted earnings.

The HSI has seen an almost 1,000 points rally so far this month, led by index heavyweight Tencent (0700) that once hit HK$529 last Friday, amounting to a market capitalization of over HK$5 trillion.

Still, the index underperformed most global peers with a 11.1 percent decline so far this year, while the MSCI All Country World Index only fell 5.79 percent during the same period.

Although the Hang Seng Index began the year on an upbeat note over the phase one Sino-US trade deal, the rapid spread of the coronavirus sparked panic selling in March, and two months later, the index once slumped over 1,000 points after Beijing unveiled plans to impose a national security law in the city.

In response to the legislation, the United States will halt the export of sensitive military items to Hong Kong, as it revokes the city's special trade status.

But analysts are downplaying the impact of US sanctions on the momentum of Hong Kong equities, and they point out that more US-listed Chinese companies will seek secondary listings in Hong Kong amid escalating Sino-US tensions, prompting turnover in the local stock market.

"The US may introduce more sanctions or policies, but in fact, the market has already digested this expectation and the negative pressure on the stock market," says Dickie Wong, executive director of research at Kingston Securities.

The move to end Hong Kong's special status is largely symbolic, as Hong Kong-US trade is insignificant, says UBS. "We do not expect any major changes to Hong Kong's capacity to continue as a major offshore financial hub for China."

And fund managers project a rebound in Hong Kong's economy next year.

UBS estimates Hong Kong's GDP will drop by 6.8 percent this year but bounce back by 4.9 percent in 2021.

But Wong suggests that retail investors take a cautious stance, as the money flowing into Hong Kong's stock market will push up valuations for new economy stocks such as Alibaba (9988), in hopes more US-listed Chinese company will return to Hong Kong.

"There are still some trading opportunities right now because the market is still hot. But if we take a longer time horizon, like in the second half of this year, maybe it's not a good time to have some position trading," says Linus Yip Sheung-chi, chief strategist at First Shanghai Securities.

Outside Hong Kong, investment houses see less upside in the US stock market over the next six months and have mixed views over other emerging market equities.

BlackRock downgraded US stocks from overweight to neutral for the next 6-12 months, after a sustained rally since late March, due to a resurgence of the virus, intensifying Sino-US tensions, and a turbulent election season.

Citibank estimates the S&P 500 Index will reach 3,160 points in mid-2021, up by only 0.96 percent from the closing level on Friday.

The valuation of S&P 500 Index is high and there could be a 10 percent correction in the short term, says Peter Yiu, associate director and private client advisor of Charles Schwab Hong Kong.

As for Asian stock markets, BlackRock downgrades Asian equities - excluding Japan - to neutral due to renewed Sino-US tensions, but these stocks remain the "most preferred" for UBS due to accelerating economic recovery in the region.

Specifically, Citibank sets a target of 4,548 points for CSI 300 Index over the next 12 months - which tracks 300 largest A-share stocks in the mainland - a 2.9 percent upside from the closing price on Friday.

Analysts also spot investment opportunities in Asia among sectors that are likely to benefit from extraordinary policy stimulus, easing restriction, and emerging consumer trends.

UBS overweights Asia's reopening beneficiaries in the near term such as consumer electronics, beverage, auto, transportation, retail industries as well as select casinos.

Meanwhile, HSBC Private Banking favors select undervalued property developers and banks which will benefit from proactive policy easing of Asian central banks and governments, as well as emergent themes including remote working, cloud technology, online learning, digital payment and online medication.

In the currency market, analysts also foresee a weaker US currency as more countries ease lockdown measures.

Citibank expects the yuan to rise to 6.9 per US dollar over the next 6-12 months, although the Sino-US conflicts, which may escalate before the US presidential election, could put downward pressure on the yuan in the short term.

The onshore yuan weakened by 17 basis points to 7.0680 per US dollar on Friday.

In addition, UBS adds that the Japanese yen is also a valuable addition to investors' portfolios, given its safe-haven feature during market selloffs.

In commodities, fund managers are bullish on gold amid low bond yields induced by aggressive liquidity injections of major central banks.

Spot gold was steady at US$1,775.32 (HK$13,847.49) per ounce on Friday, after touching a near eight-year peak of US$1,788.96 hit on Wednesday.

Citibank estimates gold price could test US$2,000 per ounce in the following 12 months.

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