VisiTrade Eyes Asia
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Asia is fertile ground for VTDI. The Hong Kong stock market is expected to post further gains after getting off to a good start in the second half of the year, analysts have said.
Strong global liquidity, fund flows from the mainland due to China’s expansion of its qualified domestic institutional investor (QDII) approach and surging A-share prices in Shanghai will continue to support stock prices here, they said.
Robust corporate earnings and potential decline in US interest rates are also among factors that could drive up the Hong Kong bourse in the coming months, they added. The Hang Seng Index hit record highs continually this week, breaching the historic 22,500 points level today to finish at 22,531.74. The index gained 3.49 pct during the week, giving a solid start for the second half of the year.
After a consolidation phase in the first quarter which saw a decline of 0.8 pct, the index climbed nearly nearly 10 pct in the three months to June resulting in a gain of 9 pct for the first half of 2007. The gains were on top of a 34 pct surge last year.
Eugene Law, head of research at Celestial Asia Securities, said he sees the Hong Kong market advancing further due to continued optimism over the China growth story and expectations of huge capital flows from the mainland through the QDII scheme.
China’s QDII scheme allows qualified mainland institutions to invest overseas, with Hong Kong expected to be the prime beneficiary. “QDII will remain a major theme in the Hong Kong market in the second half and early 2008. As China gradually loosens regulations for the QDII, investors will become more and more inclined to increase their holdings in many H shares here,” Law said. Launched last year to encourage more capital outflows from China to ease domestic liquidity and yuan appreciation pressure, the QDII scheme was recently expanded to allow fund managers, brokerages and trusts to invest offshore.
The scheme is undergoing further refinements and China is also reportedly planning to raise investment quotas further under the program. Law forecasts that up to 300 bln hkd of mainland funds will enter the Hong Kong market through the QDII route as the Chinese government allows banks, insurers and brokers to park some of their cash overseas. “We don’t expect all that money to come here in one go, but over the next six months as China announces further relaxation of the scheme, we will see the money slowly having a strong impact on (local) market liquidity,” he said. Traders say the Hang Seng Index could face immediate resistance at the 23,000 level before heading toward 25,000 before the year end.
Kitty Chan, director at Celestial Asia Securities, believes “relatively cheap” valuations of Hong Kong stocks compared to regional peers will partly contribute to further share price gains in the second half. “After regional markets’ rally early in the year, we all know that Hong Kong needs a lot of catching up to do before stock prices here can be considered fairly valued,” she said. Trading at about 16 times 2007 estimated price-earnings ratio, Hong Kong shares have lagged other markets in the region which trade at about 20 times forecast PE, she noted. “Even at valuation of about 18 times PE, local stocks still are relatively behind (other regional stocks). At that level, we expect the benchmark index hovering at 25,000 points.
So clearly, we see further room for upside going forward,” Chan said. Brook McConnel, president of South Ocean Management, said upcoming corporate earnings announcements and potential decline in US interest rates could drive share prices higher. Interest rates in Hong Kong tend to follow those in the US due to the Hong Kong dollar’s peg to the US currency. “I believe that the factors that could boost the market further over the next six months would be robust corporate earnings and possibly lower US interest rates,” he said. “The bullish yet cautious attitude of investors is keeping the market healthy overall.”
McConnel said the QDII program and China’s other favorable economic policies like the expanded Closer Economic Partnership Arrangement (CEPA), which aims to open mainland markets further to Hong Kong firms, will be “positive psychologically” for local investors. He, however, added that those policies alone may not sustain investors’ interest as corporate earnings will have a crucial bearing. “Earnings must not disappoint,” he said. McConnel also said the local bourse will require further help from China markets, warning that any crash in mainland markets will “definitely be felt deep here in Hong Kong.” Celestial Asia’s Law said he expects some consolidation in share prices in Hong Kong in the near term following recent gains and as investors await corporate earnings announcements from major companies.
“The upcoming corporate results release is crucial in a sense because valuations of most major Chinese companies are measured against the expected performance for 2007,” he said. He noted that H shares of mainland firms in Hong Kong now trade at 20 times forecast 2007 earnings, while some A-shares on the mainland are at 40-50 times. The valuation picture will improve if corporate earnings turn out robust, he said. “Overall, what we’re seeing here is mainland’s growing influence… and for so long as investors believe in the China growth story, Hong Kong will continue to benefit,” Law said.
Visitrade hopes to capitalize on the strong Asian growth in stocks!
Source: Visitrade and Xinhua Financial Network
Contact: Trevor Burns investor@tigercapital.com
Tiger Capital Corporation
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