More funds expected to quit Chinese stocks
Energy and utilities sectors to bear brunt of sell-off as investors pull out on concerns over US interest rates and weak commodities prices
More fund withdrawals are expected on the mainland markets as concerns over the economic slowdown linger, with the energy and utilities sectors tipped to take a further hit.
The prospect of a tightening interest rate cycle in the United States, fluctuations in foreign exchange rates and the damage wrought by weak commodities prices are additional dampers on the outlook.
Mainland and Hong Kong equity markets saw a weekly net outflow of about US$653 million as of last Wednesday, excluding local funds, marking the fourth consecutive week of outflows, according to fund flow tracker EPFR Global.
The average weekly outflow for the past four weeks was US$824 million, against US$504 million for the previous four-week period.
Among sectors, energy and utilities stocks suffered sharp withdrawals in October, while consumer and technology plays saw an increase in asset allocations, EPFR figures showed.
A gauge tracking Shanghai-listed energy companies fell 7 per cent last week to a four-week low, underperforming the benchmark index.
The utilities sector sank 6.3 per cent in the same period to its lowest in two months.
“Falling commodity prices are weighing heavily on energy and utilities stocks, while investors lack confidence amid intense volatility of the markets,” said analysts Li Huiyong and Li Yimin of Shanghai-based Shenwan Hongyuan Securities in a note.
West Texas Intermediate crude futures for January delivery fell 10.6 per cent last month, extending a rout in the past year. January Brent crude also slid about 10 per cent for the month.
In Hong Kong, fund flows into the oil and gas sector fell 0.8 per cent last week, while the sector’s market capitalisation dropped 2 per cent, according to Core Pacific-Yamaichi.
Mainland brokerage firms in the city suffered the biggest drop among all sectors, with the combined market capitalisation down 5.8 per cent from the previous week.
The mainland securities regulator said on Friday it would ban brokers from financing clients’ stock purchases through over-the-counter derivatives, in a move aimed at curbing speculative trading and preventing systemic risks in the stock markets.
On the same day, three of the country’s largest brokers – Citic Securities, Haitong Securities and Guosen Securities – announced they were being probed by regulators for alleged violations of regulations. Brokerage stocks fell sharply that day.
Consumer electronics in Hong Kong recorded net capital inflows last week, led by strong gains in some industry leaders. Personal computer and smartphone maker Lenovo Group attracted net buying of HK$35.7 million.
“The fund flow into Lenovo is mainly driven by expectations that the company can effectively save its cost after restructuring,” Core Pacific-Yamaichi analysts said.
“China’s competitive smartphone markets show signs of stabilisation, which should help Lenovo overcome the negative impact from a loss in the second quarter to September.”
Skyworth Digital Holdings and TCL Multimedia Technology Holdings also saw net fund inflows.
Fund managers also chased up mainland pharmaceutical shares on better-than-expected third-quarter corporate results, with Sino Biopharmaceutical and CSPC Pharmaceutical Group seeing more buyers than sellers of their shares.
Looking ahead, analysts expect fund managers to continue paring their stakes in both markets because of looming tighter US monetary policy, further strength in the US dollar, and concerns over the mainland’s economic downturn.
“We can see from recent jobs and housing data that the US economy is improving, which bolsters the case for a December rate increase,” Li Huiyong said.
“The dollar is also further strengthening against a basket of currencies on the prospect that Europe will add to its economic stimulus.”
He also noted that the mainland’s industrial profits fell significantly in October.
Meanwhile, some investors are beginning to take a closer look at H shares, which are trading at an average discount of about 39 per cent to their Shanghai counterparts.