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Hong Kong Market Strategy Bi-weekly Vol.10 2017 - Be cautious while waiting for opportunities

作者: Cliff Zhao,Vincent JI,Danxia GU
时间: 2017年06月19日
重要性: 一般报告
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摘要: Report title:Hong Kong Market Strategy Bi-weekly Vol.10 2017 - Be cautious while waiting for opportunities
Analyst:Cliff Zhao,Vincent JI,Danxia GU
Report type:Strategy
Date:20170619
[Summary]

Rate hike in line, but balance sheet normalization earlier than anticipated
The Fed raised interest rate again in June, marking the fourth in the current rate hike cycle. But the market reaction has been placid. Slow monetary policy changes will not have a significant impact on short-term economy. And only when monetary policy becomes radical and interest rates rise swiftly, or that the number of rate hikes reaches a considerable level, significant impacts on liquidity and financial markets will emerge. In contrast, the meeting made a clear reference to reducing balance sheet. The time is earlier than expected and slightly hawkish. Although the initial scale of US$10bn is in line with conservative market expectations, it is still earlier than expected as the size will be up to US$50bn. The Fed is believed to be passive when reducing balance sheet. The ultimate impacts on interest rate and liquidity are likely to be moderate. But there is no precedent to follow. The impact of the uncertainty of this new policy will be greater than the impact of rate hike on the market sentiment. With the increasing visibility of the policy, its subsequent negative impact is expected to diminish.
HK stock valuation hovering; potential earnings downside risks
Since February, HK stocks have been trading at 12x forward P/E. Given the tightening liquidity margin and more cautious market sentiment in 2H, there could be a moderate pullback pressure. Earnings failing to meet optimistic expectations may drag indexes going forward. From the perspective of top-down analysis, PPI growth has turned south. The degree of correlation between the changes of PPI and HSI earnings expectations is as high as 0.62. Other indicators like investment growth and industrial added value also have similar correlation. The May above-scale industrial added value added 6.5% YoY, flattish compared with the previous reading. 5M17 investment in fixed assets grew 8.6% YoY, the lowest in the year. It is likely to drag earnings expectations.
Low volatility sector could be safe for now
In view of the relative strength of HK stocks by industry, the IT industry has fallen into the weak range in the past week, but still led gains. In the near term, the strongest sector is property and building, but their signs of falling into the weak range is significant. The improving but lagging sector is industrial, while consumption manufacturing and consumer services are shifting from laggards to leaders. Energy, raw materials and utilities are still lagging. Banking, telecommunications, conglomerates remain weak. From the perspective of money flow, there has been an outflow since June. The biggest outflow was seen in the financial and property sector; the biggest inflow was in industrial and energy sector.
Investment advice
The Fed’s rate hike has been well expected, but uncertainty about balance sheet normalization remains a concern. Blue chips, the main driving force leading the market earlier, could be under pullback pressure in the near term on rich valuation and earnings expectations. Volatility is back. Hold defensive plays with high safety margin of valuation, like insurance, telecommunications, utilities, pharmaceuticals and consumption. Wait and buy big caps and leading growth stocks again after correction.

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