Tantalising signs of turnaround glimpsed through the gloom

PUBLISHED : Monday, 17 October, 2011, 12:00am
UPDATED : Monday, 17 October, 2011, 12:00am
 

A glimmer of optimism crept into Hong Kong equities last week, but this was pounded out of markets on Thursday and Friday with a string of bad news: JP Morgan reported a steep drop in profit; Spain's rating was downgraded, as was UBS'; and China reported slowing export growth.

Any investor wishing to take a negative view of markets continues to have his choice of issues on which to hang his anxieties.

But the flashes of positivity seen in markets is the fresher, more interesting story. For those who want to see them, there are tantalising signs of a turnaround: among them, the Baltic Dry Index, a key indicator of shipping demand and hence of global trade, has been on a strong rebound since August; US unemployment is trending down; China inflation levels are moderating.

There is a battle of rhetoric playing out that is akin to a 'knife fight between bull and bears in a back alley, at close quarters', says Todd Martin, Asia equity strategist for Societe Generale.

In Hong Kong, the argument is won or lost on the question of whether China is heading for an economic downturn.

Last week the optimists had the upper hand: China equities saw some extraordinary gains, with the top 10 stocks registering returns in the range of 28 to 46 per cent.

Rail stocks CSR Corp (1766), China Automation (569) and China Railway Group (390) received a major boost (see Ticker Board) after a report in Caijing that the Ministry of Railways may get a 200 billion yuan (HK$243 billion) state funding injection, which could unlock payment for stalled rail projects.

The ministry owes rail operators a lot of money and this could get payments flowing and mark a turnaround for the sector, which had traded catastrophically in the wake of the Wenzhou rail disaster.

China Cosco (1919), another of the year's chronic losers, also rose last week, largely on the view that the upturn in the Baltic Dry Index heralds a recovery for shipping.

But the most extraordinary turnaround has been seen in Hidili Industries (1393), which rose 72 per cent in the past 1 1/2 weeks. The volume of its shares traded in that period was 2.8 times the average.

There is no news or fresh insight that explains Hidili's turnaround. Natalie Chan, an analyst with MF Global, says the recovery has been a technical rebound following a period of heavy selling in the stock.

As a coal company that is heavily exposed to China's steel industry, the stock is also a proxy for the health of the mainland economy. Its recent rise is something of a thumbs up from investors for the country's economic outlook.

Otherwise, Esprit (330) remained a player. The stock rose 12 per cent on Tuesday after hedge fund Lone Pine Capital announced it had raised its position to become the second-biggest shareholder. The stock then dropped on Wednesday by 7.4 per cent following a Next Magazine report that mainland outlets listed on Esprit's website did not exist. It bounced up on Thursday by 15.7 per cent as investors decided that was not a concern.

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