Archive for category Equity Market
The financials market got off to a great start in 2013 as expected. Please refer the articles i have written in the past 3 months calling for this
The financial markets are likely to see a very strong year as equity risk premium for major economies such as EU, Japan, China, Hong Kong, South Korea are all over 10%. The fall in risk free rate plus the major compression of credit spread in 2012 has made equity markets one of the cheapest asset class out there. The other 2 asset class which could also perform well would be convertible bonds and high yield bonds as global default rate continue to fall on the back of quantitative easing.
Furthermore, in 2013 we are likely to see a repeat of 2003 and 1993 of which in 2003 the money that came out of the Nasdaq bubble fueled global risk assets including US subprime and asset backed markets which burst in 2007 . In 1993, the money that came out of post Japan bubble also fueled the markets in Asia ex Japan which resulted in the 1997 Asian Financial Crisis later on. I believe we are seeing a repeat here as globally central banks has embarked on massive quantitative easing and this year onwards the money is going to flow out of government bonds and money market funds to fueled risk assets especially those markets trading above historical risk premiums.
Stay tune for Part 3 of this article – as I analyze sectoral performance globally.
2 months ago I made this call on Chinese Equity Markets and Currency – Equity markets defied the fall last night to rally to new highs this month…What about other indicators?
2 months ago I made this call on Chinese Equity Markets and Currency. Since then the benchmark indices have rallied more than 10% to recoup all losses this year while the currency has hit a new 19 year high against USD
Domestic Chinese A-shares fell to 4-year low today, however many Chinese equities or China related equities listed overseas are rising in value. This include H-shares in Hong Kong as well as China related shares in US, Japan, Hong Kong and Singapore. How do we read into it? In my recent conversations with onshore and offshore investors, there seems to be a reverse in terms of their outlook this time around. Domestic investors are less convince on the performance of the equity market going forward due to the fact for the pass 4 years China has registered above 30% in accumulated growth and property prices have doubled but we have seen flat performance in its equity markets. Foreign investors on the other hand are beginning to turn bullish on Chinese equities and its currency on the back of cheaper valuation on a global comparison. It is therefore a very smart move by investors to purchase Chinese companies and China related companies listed overseas. By the act itself, investors are buying cheap call option on the performance of Chinese equities and currency in the medium term.
The current disparities between growth (+1.3%), deposit rates (zero!), inflation (5%) and property prices (20%) in Hong Kong its like watching a race between a hamster, tortoise, horse and cheetah! As mentioned in part 1 of this topic, the reason why there is inflation and upward pressure in monetary value of certain services and assets in Hong Kong is largely due to the demand from external factors. Similar to my analogy of Hong Kong resembling a shopping mall, most of the key products and services are targeted at serving/providing to foreigners (in a good way) The 3 key areas of growth for Hong Kong in this decade comes from the financial, property and luxury consumer sector which is largely targeted at foreigners (foreigner buying up luxury apartments, foreign companies raising IPO, foreign tourist buying up luxury products etc.)
Ok then you must be thinking what is different this time compare to 10 years ago? It is the HKD peg. Chinese Yuan and other Asian currencies have appreciated over 20% against HKD in the past 5 years and this trend is likely to continue with the quantitative easing in the west. The HKMA and Financial Secretary have denied the peg has brought about inflation? Look at 10 years Hong Kong Government Bond Yields 0.46%?! This is largely due to inflow of money and the result of increase in monetary base from defending the peg. 10 yrs yield at 0.46 while inflation is 10x of that??
Why are they in denial?They are just afraid to say it because given how well the peg has served Hong Kong, no one is going to change the peg, be it someone in HKMA, government or even the PBOC and the Chinese Government. One must also know this the HKD peg served as a good indicator for China on liquidity flow so why remove that….But something has to be done if we were to see a fairer race among the people in Hong Kong than the one we currently have. The peg can stay but for the sake of Hong Kong people who is reading, you should take your money out of the bank and move it into RMB, buy some equities or fixed income investments and last YOU mustn’t sell your property. If you don’t own a property in Hong Kong means you are short and the peg will kill you…If one decide not to do anything of such, they better make sure he/she gets a work in this mall or else you would be poorer even though the country continues to prosper….
China plans to move toward full liberalization of interest rates, but hasn’t outlined a specific timetable for the reform. PBOC’s Zhou echoed the Chinese leader’s wish during the first day of the 18th National Congress of the Communist Party of China (CPC) which would last for a week. In President Hu’s speech, he emphasis on market developments, increasing domestic demand and improving people of China’s wellbeing by targeting a doubling of per capita income by 2020. I have no doubt the doubling of per capita income would be achievable but the quality of the income may vary significantly. I support PBOC Zhou’s push for interest rate liberalization because this step is needed to ensure a proper formation of the second phase of China’s monetary system to ensure capital are allocated efficiently to the hands of people and companies that produces the most economic and social benefits to the people of China. Even though I am not from China (but ethnic Chinese by birth!), I would be ecstatic to see this happening. Could you imagine the multiplier effect on mankind would be with 1.3bil people having the ability to contribute effectively to the world or at least able to improve the quality of their own lives? However, what would be the impact of such liberalization? It would mean further opening up of the banking and capital markets to global institutions, doing business based on market clearing levels and allow capital to flow to the highest risk adjusted return investments. However, Chinese financial institutions would need to innovate fast and moving up the knowledge chain at lightning speed to assist and be part of such liberalization. I witnessed the road to 1997 Asian Financial Crisis and my advise to Chinese leaders today is to ensure great governance over such liberalization. Liberalization is good if not great but only if it is done properly.
China PMI rose as expected. This did not come as a surprise as indicators such as retail spending, freight volume, overtime etc has been on the rise recently. What is extremely encouraging was the reading was strong despite the general slowness in October with long holidays and leadership transition in the horizon. I am certain further picked up in economic activities and growth in months and quarters are very likely and the recovery seems broad-based too. Some critics who are unfamiliar with the developments in China might point to the lacklustre lending numbers but if one was to add the growth in debt issuance (which are typically long-term financing) the total pick up in financing activities have actually picked up in pace and in strength. I would suggest readers to position for beaten down sectors (credit and equity included) to have a good rally in the next 3 months. In debt, Chinese Property, Auto Sector, Cement, Retail while in equity, Property, Auto, Retail, Construction, Healthcare, Logistics, Brokerage would be my obvious sectors picks.
Running up to the US election and Chinese leadership change and now Hurricane Sandy, risk assets have pulled back last few days. I believe this week would be the best time to add risk assets to your portolio if you have miss the boat earlier. Global inflation have started to pick up and fund flows have move out of money market funds in search of yields and returns as US and China economic data points to further recovery. Right now many global investors has parked cash in low yielding fixed income instruments such as government bonds. Once global economy picks up slighlty and QE being withdrew from the system money will chase for higher return assets and given low valuation in the equity and credit space, we will see a long and sustain run up in the Risk assets in 2013.
Hong Kong Exchanges and Clearing Limited (HKEx) has welcomed the debut on October 29 of the first RMB-traded equity security on Hong Kong’s Stock Exchange – the world’s first RMB-traded equity security outside Mainland China, and the Exchange’s first dual counter equity security. The RMB-traded shares of Highway Infrastructure Limited are in addition to its previously-existing HKD-traded shares, and all of the shares are under the dual counter model (under the dual counter model, there are RMB and HKD counters of the same class of shares that trade in RMB and HKD respectively, have different stock codes and short names, and are fully transferable).
I believe this is a new beginning and provides investors alternativea new asset class to deploy their offshore RMB to just fixed income and deposits at the moment
Equity markets defied the fall last night to rally to new highs this month…What about other indicators?
Credit markets shown the similar decoupling vs Europe and US with Itraxx Asia narrowing 5bps today. DXY up, AUDJPY up, SGDJPY up despite the fall in EUR. Fund flows data tomorrow is likely going to point to further fund flows to Asia from western develop markets. This is the common given money will raise for the highest potential return in an improving global backdrop. I would bet on a stronger CNH/CNY and Chinese Equity markets next 9 months.
Remember what 1993 and 2003 did for Asian markets. Yes 3 years of very strong uptrend on the back of deregulation or fiscal or monetary easing by the western economies. This time around Chinese stocks are so unloved and underowned (most of the investors i talk to have been adding into bonds/credits, real estate and PE) last few years. The position away from equities seems very crowded and I would bet for a sharp rise in 2013 similar to the 2 decades ago in Asian markets but this time led by China…