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Meet the new rally, same as the old rally

The sharp swing in prices over four months matches pattern seen at the end of last year as the mainland eases off on tightening measures

PUBLISHED : Friday, 20 September, 2013, 12:00am
UPDATED : Friday, 20 September, 2013, 3:57am

The Hang Seng Index is up 19 per cent since June 24 following a 15 per cent drop in the preceding month, marking a sharp swing in prices over the four months.

Volumes were thin, at 10 per cent below the five-year average, which warns against reading too much into the trends. But this year's rally is following a pattern seen last year, implying the market will continue to trade up for the rest of the year.

"Last year, we had a big rally, 28 per cent from bottom to top, starting on September 12 to January 13. The big picture was that the [central] government wanted to slow the economy down. But by mid-year, they decided it was slowing too fast, so they loosened things up," said Francis Cheung, the head of China-Hong Kong strategy for CLSA. "We are seeing a similar dynamic this year."

The pattern for this year and last has been for a year-end rally, but off a weak base. Mainland equities tend to sell off in the first half, thanks to government tightening measures, and the first half of this year was no different.

"In February, signals from the People's Bank of China were that credit would be restricted. This became a day-to-day policy in March," said Mark Konyn, the chief executive of Cathay Conning Asset Management.

Erwin Sanft, the head of Hong Kong-China equity research for Standard Chartered, said mainland banks tended to offer a lot of credit to firms in the first quarter, which prompted the government and central bank to tighten money supply in the first half of the year. They then moderated policies, leading to a rebound in the second half.

There are similarities [between this year's rally in mainland equities and last year's]," Sanft said. "A lot of credit is given in the first quarter, and then tightening measures kick in in the first half. But in the second half, the credit environment starts to get easier."

The first-half tightening was most dramatically seen in the decision to not intervene in the interbank market when lending rates soared in June. The authorities were also trying to rein in the vast shadow banking system.

Beijing pulled back in both cases. The PBOC started pumping money into the interbank market in July, and it moderated its shadow banking clampdown at about the same time.

There was an effort to tighten up on wealth management products, but after June that was let go," Sanft said.

This year, the credit story has a global angle. United States Federal Reserve chairman Ben Bernanke hinted on May 24 he was looking to roll back plans to buy US$85 billion of bonds a month. But he surprised markets on Wednesday by saying he would not taper quantitative easing yet, sending the Hang Seng Index up 1.67 per cent yesterday.

US investors are driving the buying.

Many fund managers in June were overweight the US and underweight Asia. That reversed in August on the view that emerging market valuations are attractive," said Connie Sin, a director of Noble Apex Advisors, a wealth management firm.

Investors might wonder if the rally is sustainable.

A key Communist Party meeting in Beijing in November may see stimulative reforms, such as a breakthrough in the mainland's urbanisation push. Hopes are also high for the free-trade zone in Shanghai, approved by the State Council last month.

The new development is the Shanghai free-trade zone. It will be the window for reform. The earnings impact will be minimal, but people are feeling that reform is moving to the right direction," said Lu Wenjie, an H-share strategist for UBS Securities.

Sanft said the market could repeat last year's pattern by trending higher until the end of the year, only to get sold off in the first half of next year.

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