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Tuesday, June 28, 2016, 22:26

Hard stretch forecast for HK stocks

By Lin Wenjie
Hard stretch forecast for HK stocks
Traders work on the floor of the New York Stock Exchange on Friday. Joining a worldwide sell-off, US stocks tumbled, as the UK’s decision to leave the European Union fanned speculation that a divided Europe would put another brake on already fragile global growth. A series of negative factors, including the slowing Hong Kong and Chinese mainland economies, and a swinging renminbi, will continue to weigh on Hong Kong’s equity market, experts say. (Michael Nagle / Bloomberg)

With dark clouds mushrooming over global equity markets reeling from Britain’s shock exit from the European Union (EU), Hong Kong is likely to bear the brunt of the hit in Asia over the next three months, with other major Asian bourses more resilient to the backlash.

Market gurus are adamant that a host of other local negative factors, including the slowing Hong Kong and Chinese mainland economies, a weakening yuan and the property sector still stuck in the woods, will further fan investor apprehension.

“The Hong Kong market is extremely sensitive to what’s happening worldwide. The Hang Seng Index (HSI) is prone to the negative sentiments arising from the Brexit vote,” said Jack Siu Chi-ming, investment strategist at Swiss financial services giant Credit Suisse.

“Besides, the city’s macroeconomic environment remains challenging with few signs of the property cooling measures being reversed, and low tourist arrivals from the mainland, which have all been reflected in the Hang Seng Index.”

However, the investment bank has not slammed the door on Hong Kong’s information and technology stocks. “IT companies do enjoy high profitability as many of them have healthy balance sheets,” Siu said.

The Hong Kong bourse joined global and regional markets in a panic sell-off on Friday in response to the British vote to quit the EU, with the HSI plunging more than 600 points, or nearly 3 percent, at the close of trading after having tumbled more than 1,200 points at one stage. The rout continued for a third day on Tuesday as the benchmark gauge shed 0.3 percent to end at 20,172.46.

Credit Suisse expects Hong Kong stocks to underperform in the second half of this year, projecting a three-month forecast for the HSI at 18,500 points and a 12-month-forecast at 19,300.

“The current downturn has been the result of market panic,” said Ken Peng, an investment strategist at Citi Private Bank, who holds a more optimistic view of the local stock market. “After the panic, heavyweight equities may find some opportunities.”

Hong Kong retailers are equally skeptical, expecting the Brexit vote to signal more trouble ahead, as a stronger US dollar and a faltering renminbi will continue to keep mainland visitors at bay.

Sa Sa International — Hong Kong’s largest cosmetics retailer — last week posted a 54-percent drop in profit, with its share price having shrunk almost a quarter in the past 12 months.

The Chinese yuan is expected to extend its slide against a basket of currencies, with a three-month forecast of 6.65 and a 12-month projection of 6.9 yuan per US dollar, Credit Suisse said.

Other Asian equity markets have held off the Brexit fallout well. As negative emotions faded, the Shanghai Composite Index climbed 0.58 percent to 2,912.56 points on Tuesday. South Korea’s KOSPI Index surged 0.49 percent for the second straight session to 1,936.22 points, rebounding from Friday’s 3.09-percent plunge.

Overall, Credit Suisse remains negative on global equities, downgrading the UK market to “underperform”, Europe’s to “neutral” and upping that of the US to “neutral”. It views risk assets, like equities, subordinated bank and insurance bonds and high-yield bonds, as likely to face a sell-off, while safe-haven assets, such as core government bonds, the Japanese yen and gold, will be in high demand.

The financial house sees the yen picking up to 102 per US dollar over the next three months, and the country’s policy rate reduced by 20 base points. On the contrary, it expects the British pound to depreciate to 1.3 per US dollar or below in the near term.
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