The Dark Cloud Above The Hong Kong Market

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Includes: AFTY, ASHR, ASHS, CAF, CHAU, CHIE, CHII, CHIM, CHIQ, CHIX, CHN, CHNA-OLD, CN, CNXT, CQQQ, CXSE, ECNS, EWH, FCA, FCHI, FHK, FXI, FXP, GCH, GXC, HAO-OLD, JFC, KBA, KFYP, KWEB, MCHI, PEK, PGJ, QQQC, TAO, TDF, XPP, YANG, YAO, YINN, YXI
by: Futron Investment (HK) Ltd.

Summary

The upcoming mid-June approval of the nomination process for the new 2017 Hong Kong (HK) Chief Executive Election holds the ultimate key to the future of Hong Kong.

US interest rate hike expectations and the US dollar appreciation cycle represent a frightening combination to any experienced HK investors.

HK is now becoming a major battleground between traditional foreign investors and new incoming China investors with completely opposite outlooks and expectations.

This is an extract from our 2015Q2 Letter for Investors, specifically on the HK market.

Full version of the letter is posted here on our instablog.

The Hong Kong Market

US interest rate hike expectations together with the US dollar appreciation cycle represent a frightening combination to any experienced HK investors. We have witnessed this pain numerous times in the past. The HK stock market is traditionally controlled by foreign investors, and every strong US dollar cycle will cause massive capital outflows, causing volatility and a painful correction in the HK market.

Without a doubt, HK is now becoming a major battleground between traditional foreign investors and the new incoming China investors -each with completely opposite outlooks and expectations. Traditional foreign investors used to control every aspect of the HK market, commanding big rallies and leading big IPOs. Nowadays, their market throne is being challenged every day by the China investors. The recent controversy around Hanergy Thin Film Power Group Ltd, 566.HK, is a perfect example of such battle between the two groups.

Ruthless China investors had been pushing an unproven solar technology company to an unimaginable level of +HKD$350 billion market capital in less than a year. Then, the old boys from Wall Street crushed their stock by half in a morning, timing it perfectly when their top managements were in the middle of their annual shareholder meeting press conference. The stock was halted since then.

In the first five months alone, we have witnessed China investors trying aggressively to push the HK market higher with a tailwind from the A-share rally. However, traditional foreign investors are selling out, suppressing the market mainly due to concern of the strengthening of the US dollars and the coming rate hike expectations. Unsurprisingly, massive amounts of capital from both sides will continue to collide, causing much higher volatility in the HK market.

The upcoming mid-June approval of the nomination process for the new 2017 HK Chief Executive Election holds the ultimate key to the future of HK. HK's society is deeply divided and the government is struggling to move forward. If the nomination process is not approved, the muddy cloud above HK's future will get even darker and this will continue to puzzle HK investors for the remaining year. Despite a +15% gain for the year in the Hang Seng index, we continue to hold a conservative outlook for the HK market. Unless we see a sudden change of attitude from the non-bullish foreign investors or the successful approval of the nomination process, we expect the HK market to trade sideways at the current range between 26000 to 28000 in Hang Seng index for the remaining year. And, between HK and China market, we believe the China market still holds a much bigger opportunity this year.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.