Hong Kong, China markets poised to climb higher in 2nd half, but risks also rising, says CCB
The bullish momentum in mainland Chinese and Hong Kong stock markets may continue into the final quarters before tapering off towards year’s end due to interest higher interest rates and tepid corporate earnings growth, said China Construction Bank (CCB).
The bank said on Wednesday that investors had to be nimble in the coming months, as Asian markets were poised to track higher amid what could be a major topping of the stock market for this business cycle.
The bank forecast the Hang Seng Index to rally to 29,000 by the fourth quarter before pulling back to settle around 25,200. The index now is at 25,683. Similarly, the bank expects the Hang Seng China Enterprises Index to rally higher in the fourth quarter, likely ending the year at 10,800 points. The index is at 10,408 currently.
“We think equity markets will be robust, at least in the short term, because China’s economy is doing well and the potential US economic slowdown is exaggerated,” said Mark Jolley, equity strategist of research at China Construction Bank.
Buoyant domestic economic growth in China should help to underpin mainland stocks, according to the CCB’s report. It also noted that China is preparing to open its bond market to international investors through the “Bond Connect” programme, which may help to ease liquidity problems in financial markets.
“More international capital will flow into this area due to its growth potential and the improving investment environment,” said Jolley.
Among sectors, financial, health care, and information technology were expected to be the best performing.
“We expect to see laggards begin to catch up, especially among the rapidly growing small and medium enterprises and large-cap banking stocks,” said Peter So, managing director at China Construction Bank.
But the expected uplift for the Hong Kong and mainland stock markets is more of temporary reprieve, as a bear market could emerge towards the end of the year, the bank said.
“At some point, investors will have to switch from a bullish stance to a defensive one,” said Jolley.
Among the mounting storm clouds, he noted that corporate earnings have not grown significantly in the last six years, even as the market indexes have kept rising.
In addition, stock market indexes, particularly in developed markets, have risen to extreme valuations, raising concerns that there’s little to justify the rally. Meanwhile, emerging market indexes, although cheaper, have begun to catch up with their developed counterparts.
Sentiment could turn downwards if corporate earnings disappointed, especially during a tightening interest rate cycle, the bank said.
Among sectors, industrials and materials related companies tended to perform the worst during a economic slowdown, the bank said.
Real estate will also be negatively impacted if mortgage rates are pushed higher, the bank said.