Quantitative easing, BRICS, double-dips dominate talk
Stocks are down, bonds are flat and the global economic outlook is bleak - but jargon is up, what with all the talk of double-dips, QE3 and BRICS.
Double-dip, at least, is the phrase of the moment. It addresses the possibility that the US and Europe will dip back into recession. The catalyst for that discussion last week came on news of weak US employment data and stagnant growth in manufacturing orders and, most notably, the decision by Brazil's central bank to cut interest rates by 50 basis points.
Brazil is the first of the BRICS (Brazil, Russia, India, China, South Africa) countries to swing to a monetary easing stance, indicating that even the fastest growing economies are vulnerable to a slowdown.
Talk of a new US recession has fanned speculation the Federal Reserve will initiate a third round of quantitative easing (QE3) after all.
'The SG base scenario is that QE3 won't occur before year's end, but that view is under debate. I would say QE3 is front and centre,' says Todd Martin, Asia equity strategist at Societe Generale.
Within those big macro-themes, a number of Hong Kong stocks were on the move last week. This included China Construction Bank (939). Bank of America finalised a plan last week to sell half its US$16.6 billion stake in CCB. The news removed a major overhang on the stock, and CCB rose 8.5 per cent last week.
China National Materials (1893) was another big gainer. The share price came up 16.2 per cent after it posted decent (but not spectacular) first-half results on Wednesday. A sales trader suggested the stock was getting interest from hedge funds that saw value in the counter after it fell 40.8 per cent from July 5 to August 26.
Elsewhere, Esprit (330) took yet another hit last week following a profit warning from the firm on Thursday. It fell 10.1 per cent on Friday.
Investors are also getting nervous about the Macau gaming sector, the trader said. Following a spectacular run in which the casinos have been routinely announcing record monthly revenues and visitors, there is a sense that growth could be peaking. Galaxy (27), SJM (880) and Sands (1928) were all up last week, but the stocks were registering big intraday swings, indicating investor nervousness.
Permira, an investor, sold a HK$4.78 billion stake in Galaxy on Thursday at a 5.1 per cent discount to the last closing price, and indications were that this was a tough sell.
Investors are looking for value stocks. China Rail Construction (1186), whose share price imploded following the collision in Wenzhou, Zhejiang, pays a 6 per cent dividend yield and is trading at about an 80 per cent discount to its long-term price to book.
Martin, at SG, notes that markets are pricing in two negatives: the possibility of a recession and high interest rates. He notes that China has many options for dealing with a downturn, including interest rate cuts, and its response could easily change investors' pessimistic take on local markets.