DDN Business Insider | Bullish outlook for HK equities as index surpasses 19,000, analysts say

Editor's note: Recently, the continuous strengthening of Hong Kong stocks has aroused attentions in the public. Data shows that the Hang Seng Index (HSI) has risen by more than 20% from the yearly low of 14,794 points in January, entering a technical bull market. Can Hong Kong stocks continue this uptrend, and what are the risks to watch out for? Regarding these topics, we have invited Hong Hao, Chief Economist of Grow Investment Group and Yu Fenghui, economist, expert of the Top 100 Hong Kong Listed Companies Research Center, and new finance expert, to bring their comments and analysis.

【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. Recently, the continuous strengthening of Hong Kong stocks has aroused attentions in the public. Data shows that the Hang Seng Index (HSI) has risen by more than 20% from the yearly low of 14,794 points in January, entering a technical bull market. Can Hong Kong stocks continue this uptrend, and what are the risks to watch out for? Regarding these topics, we have invited Hong Hao, Chief Economist of Grow Investment Group and Yu Fenghui, economist, expert of the Top 100 Hong Kong Listed Companies Research Center, and new finance expert, to bring their comments and analysis.

【Anchor】First of all, Mr. Hong, what factors do you think are mainly related to the emergence of the technical bull market? What are the factors that support the fundamentals of this bull market?

【Hong】I think Hong Kong's economy has performed better than expectation this first quarter. This is a very important point. The flow of capital is also important. The reduction of underweight allocation by foreign investments in Hong Kong also marginally supports Hong Kong's capital market. These are all supporting Hong Kong (market)'s performance. We have already mentioned these before, so this is one of our previous predictions transformed into reality.

【Anchor】At the same time, we can also see that Hong Kong stocks have retreated after the previous consecutive surge. Mr. Yu, what do you think will be the extent of this pullback? Will the technical bull market continue?

【Yu】A technical bull market does not mean that the market will generate a period of correction or rather a large correction. This is a normal phenomenon, especially after a series of continuous market upturns. As for the extent of the correction, it depends on the support level. If the market has broken through the key support level, then its short-term correction will seek a gap. In this case, if it turns into a support level or moving average, then after a short pullback, the technical bull market will present again. Whether the technical bull market can be sustained depends on several factors.

The first major factor is economic fundamentals. Although we have gone through the COVID-19 pandemic and a downturn period, but the economic fundamentals are gradually performing better. In fact, we now expect the economy to improve, so this is a key issue for the continuation of the bull market in Hong Kong stocks. The second factor is capital. How is global and local liquidity supporting the stock market? The liquidity (created by the) monetary policy has a direct impact on the stock market. Currently, there is an upward trend in the RMB and Hong Kong dollar, after a slight devaluation of the currencies

This upward trend means that capitals are gradually flowing in. So liquidity is improving in both Hong Kong and A-shares. Thirdly, market sentiment. Investors are in a high state of sentiment after ten consecutive stock rallies. Optimistic sentiment has been a main driver pushing the Hong Kong stock market higher. The last and largest factor behind the rise in Hong Kong's stock market is the external environment. This is something I'm more worried about, and it may have an impact on Hong Kong stocks and A-shares. In my opinion, although there is still a long way to go before the technical bull market turns into a real bull market, I am optimistic about how much the technical bull market will fall back.  Investors should mainly focus on risk prevention. Avoid blind investment

【Anchor】OK. Mr. Hong, do you think this technical bull market is a real bull market? What do you think about the future of Hong Kong stocks?

【Hong】A technical bull market is a real bull market. The backdrop of all bull markets is the extent of the uptrend. So I don't think the argument that a technical bull market is not a bull market is correct. If there is profit to be gained, a technical bull market is a bull market. What's more, we also emphasized that (our expectation for the stock index) this year is between 16,000 and 23,000. But now we are at about 19,000, there is still upward space.

【Anchor】For Hong Kong stocks, Mr. Yu, what other risk factors do you think we need to pay attention to?

【Yu】The first one, as I said just now, are the uncertainties in the global economy and politics, especially the relationship with the US. If global geopolitics (risk) continues to intensify, Hong Kong, as a relatively open region, will be impacted immediately. So we need to pay attention to the global situation.

The second is the China-US relationship. If the relationship improves, it will particularly be beneficial to Hong Kong stocks. If the current China-US relationship is maintained or deteriorates more, the impact on Hong Kong stocks will be great, even greater than that of the A-shares. I also want to remind everyone to pay attention to this. The third point, exchange rate risk. As the Hong Kong dollar is pegged to the U.S. dollar, the risk in the exchange rate is greater than that of the RMB, in my opinion. So we need to pay attention to the Fed's monetary policy. At present, the main concern is when will the Fed announce an interest rate cut.

If the Fed does not cut interest rates, inflation in the US continues to rise, and the Fed raises interest rates again, it will have a relatively large negative impact on the Hong Kong stock markets. However, it seems unlikely that interest rates will be lowered this year, as it is not on the agenda of the Federal Reserve. Maintaining the current policy will still impact the Hong Kong stock market negatively. The fourth factor is the performance of the mainland economy. The Mainland economy and the Hong Kong economy are now more closely correlated. So the Mainland economy is also recovering. However, I think that the recovery is not as good as we expected, and not as optimistic as the data released by the government.

In fact, it is a little bit weaker than the data released by the country. I would like to remind investors in Hong Kong to pay attention to this. The fifth is corporate profitability. As I am in mainland China and state-owned enterprises are listed here, they are regulatory tools of the stock markets. When looking at the role of profitability in promoting the market, we need to look at the competition and profitability of private enterprises in Hong Kong and the Mainland. At least from the present point of view, it is still not as good as expected, and I hope that we will also pay close attention to the impact of the risks of Hong Kong stocks.

【Anchor】At this point in time, for normal investors, Mr. Hong, do you think it is a good time to buy Hong Kong stocks, or should we remain cautious?

【Hong】I think the rise is far from over, don't worry. As long as China's real estate policy changes and the rise in U.S. monetary policy stabilizes, the market will gradually rise. I think we should remain calm. We shouldn't be anxious about a little bit of volatility. No stock market rises every day. This is not how the market functions

In fact, from the bottom during the Chinese New Year to now, it has risen for three months. Although it is a series of twists and turns, it is not accomplished overnight.

We shouldn't be anxious because of a little bit of change, because the trend is obviously not finished. In the short term, the market might have been overbought, but these are technical problems. The most fundamental factor in determining the trend is the fundamentals, not technical or market sentiment. The most important is that the technical fundamentals are improving

【Anchor】Alright. In a bull market, we know that the performance of different sectors is different. Mr. Hong, which sectors do you think are worth paying attention to?

【Hong】I recommend the mining industry, such as gold mining, and copper mining, and also high dividend opportunities, and state-owned companies, which will bring relatively stable income yield. As for gold mining, the shares will continue to rise with the rise of the gold price. So the public can pay attention to these. In addition, there are opportunities in the consumer sector. It is very clear that service and experiential consumption data are also very good.

【Anchor】Alright. Considering that the linkage between Hong Kong stocks and A-shares is gradually increasing, Mr. Hong, how do you see the future trend of A-shares?

【Hong】We predict the A-share will be below 3,000 to 3,400 points this year. Now it is between 3,100 and 3,200 points, so there is still some room. But A-shares often rise slower, it is not as crazy as Hong Kong stocks, which can rise a thousand points a day. A-shares are a little slower but still have opportunities.

【Anchor】Alright. Mr. Yu, what do you think about A-share's trend?

【Yu】There is correlation between Hong Kong stocks and A-shares, and the correlation is becoming tighter. However, there is still a certain degree of independence in their movements. If you are asking for my prediction of the A-share's future trend, the following factors need to be considered. The movement of A-shares also reflects the function of the macroeconomic environment. Therefore, the current growth rate of the Chinese economy, the level of inflation, unemployment and other macroeconomic indicators will have a direct impact on the performance of the A-share.

Secondly, policy support. The current policy support is the strongest. Since the stock market crash on Jun 12th, 2015, one of the biggest changes of the A-share is the strengthening of its macro-control capability, including monetary policy, fiscal policy, administrative policy, and industry policy. The capability to regulate the stock market is getting stronger. That is to say, the market has become a slightly less important factor in determining the direction of the stock market. The current policy measures to support the A-shares provide the market with an optimal environment. But how will the A-share perform is yet to tell.

Thirdly, the progress of reform. We need to pay attention to the upcoming 3rd Plenary Session of the 20th CPC Central Committee. So far, there is only one word in the publication by different departments of the government-reform. It is said that the reform of state-owned enterprises will also be significant. If the market can break through 4000 points, we can say that the bull market is established in A share. Therefore, the A-share market will certainly have a short-term correction, but in the medium term or a few months later in the second half of the year, I am still relatively bullish (about the market trend).

【Anchor】Meng Yi, President of the Institute of Finance of CCTV securities information channel, also mentions in our interview, that the bull market has just begun.

【Meng】I think if investors focus on operation rather than analysis and perceive the current trend as upward, they will thus be able to tolerate a temporary pullback and engage in buy-and-hold operations. The extent of the pullback cannot be determined at this time. I personally feel that the bull market is just beginning, and there is a higher probability that the market will sustain.

I think (investors can) select some stocks with high probability of strong performance in structured bull markets. For example, the concept of "valuation with Chinese characteristics", and the high-quality enterprises being undervalued. But (we need to notice that) because of the structured market trend, some penny stocks and subject stocks will not follow the general trend of rise. These kinds of stock should be avoided.

【Anchor】In addition, Dong Shaopeng, China Stock Market Policy Expert and Senior Researcher from the Chongyang Institute for Financial Studies at the Renmin University of China also mentioned in the interview, that Asian region's assets are now more attractive.

【Dong】With the adjustments of the Hong Kong stock market in 2023 and of mainland China's stock market, the Asian region's assets showed a stronger attraction. Therefore, some capitals choose to return to the Asian market, including Hong Kong's stock market for their allocation. With the ongoing Ukraine crisis, and at the same time, the positive factors are mainly focused on Asia, for example, the upcoming 3rd Plenary Session of the 20th CPC Central Committee, which will launch a series of reforms and opening up of new initiatives.

China is promoting large-scale trade-in programs, while also increasingly investing in new energy and other areas of science and technology, including increasing the attraction of foreign investment. This makes Hong Kong's stock markets and related assets, which are dependent on the Mainland, more attractive. Of course, as the game of international capital is not over, relevant countries led by the US are still making policies to suppress and block China. This will inevitably put pressure on some assets in the Hong Kong stock market that are dependent on the Mainland, especially red chips and H-shares. So Hong Kong does not yet have the perfect conditions for a bull market, but it can be understood that this is testing for the bull market. After a period of accumulation, especially when the Fed's policy becomes clearer, I believe Hong Kong's stock market will be on a further upward trend.

【Anchor】OK, thank you all. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thank you for watching, and see you next time.