Liquidity will drive up Hong Kong stock in 2013: SCMP Survey
Some fund managers warn of tepid second half, telling investors to prepare to cash out
Hong Kong stock prices will will see growth in the low teens next year amid ample liquidity and a recovery on the mainland, say market players.
According to the median estimate of 13 strategists and fund managers polled by the South China Morning Post, the Hang Seng Index is likely to rise to 24,500 points by the end of next year.
But some strategists and fund managers also warn of a lacklustre second half and say investors should prepare to cash out in the second quarter as the cyclical recovery may lose steam and some sectors like banks, materials and energy firms could become overbought by then.
"We are seeing industrial corporate margins coming back next year, providing Hong Kong stocks a 10 per cent upside. However, this cyclical recovery would be much milder than that in 2009," said Caroline Maurer, who manages the Henderson Horizon China Fund, the best performer among funds focused on the Hong Kong stock market.
"The coming year will not be an easy one," Maurer said. "Investors will start getting concerned about this growth story again probably in the second quarter because by then, they may realise that commodity prices won't go up much, affecting those companies," she said.
The key to gauging the upside potential of the Hong Kong market next year is the structural reforms initiated by Beijing, Maurer said. "The second half may not be as bad as most people think," she said, adding that the market could go up by 20 per cent if new policies give investors confidence and trigger some re-ratings of stocks.
Most sectors on the MSCI China Index are trading at discounts to their historical averages. Financial stocks are the cheapest, trading at a 40 per cent discount, followed by health care, utilities, telecommunications and industrials.
As for sectoral allocation of portfolios, strategists from Goldman Sachs, UBS, HSBC and select star fund managers are bullish on cyclical shares, including some industrial and resources firms, on the back of a boost in China's infrastructure spending, despite a potential sell-off in the stocks next quarter.
Cyclical stocks are affected by ups and downs in the overall economy. They are generally companies that sell discretionary items which people buy more in boom times and cut back on during recessions.
HSBC fund manager Mandy Chan, whose fund beat the Hang Seng Index this year, said investors should buy cement firms as prices could peak as a result of the drive for affordable housing.
Property, consumer discretionary and energy firms such as China Oilfield Services and Kunlun Energy helped Maurer beat the index this year. Yet, most fund managers said they may stay away from big purchases of property stocks next year.
Bank of America Merrill Lynch China strategist David Cui said the government may announce harsher policies next year if home prices shoot up. Meanwhile, he said, bad debt problems at banks may snowball, and warned investors to ignore mainland bank stocks.
Ryan Tsai, Coutts' senior investment strategist for Greater China, said: "The strong rally in the sector this year and increasing policy risks next year would keep us away from aggressively adding positions in real estate."
The Hang Seng Index has risen 22.4 per cent this year, after a 20 per cent slump last year. Property stocks were the top performers, rising 40 per cent.
More than 75 per cent of this year's gains came after the US Federal Reserve's third round of quantitative easing in September, which triggered a wave of hot money into Asian markets and the ensuing buying spree of Hong Kong stocks.
Mean daily turnover of the market this year is HK$54 billion, 23 per cent less than last year. The Hang Seng Index is trading at 15 times estimated earnings next year, close to its historical average.
According to UBS Asia-Pacific regional chief investment officer Yonghao Pu, the hot money inflow would continue to help rally stocks in the coming year. "Hot money always loves more liquid assets, such as equities, rather than real estate," Pu said.
Another source of strength could be the mainland stock market, which may rebound after a three-year trough. Investors, including star Fidelity fund manager Anthony Bolton believes A shares will bottom out next year.