Analysts go on the defensive, as risk aversion builds
Asian markets will continue volatile as investors await Britain’s referendum on EU membership, and fears linger over the health of China’s economy
June is proving volatile for stock markets, as growth fears and external uncertainties push investors toward safe-haven assets.
And with a series of central bank meetings and the Brexit vote around the corner, analysts predict increased volatility in coming weeks, and are now recommending defensive sectors and cyclical stocks, which could benefit from China’s new economic model.
A shares have tumbled this month, with the benchmark Shanghai Composite Index down 2.7 per cent in the past fortnight.
The index plunged 3.2 per cent on Monday alone, the biggest daily drop in almost four months, a year to the day since the 2015 stock market rout.
Other Asian markets fared little better.
Japan’s Nikkei Average closed 3.5 per cent lower, Hong Kong’s Hang Seng Index dropped 2.5 per cent.
While in the US, the S&P 500 index lost 0.8 per cent and the Dow Jones Industrial Average fell 0.7 per cent on Monday.
“There are a number of near-term risks and uncertainties, in particular the growing expectation that Britain may vote to leave the European Union in the June 23 referendum, which has stoked anxiety in financial markets around the globe,” said Xiao Shijun, an analyst for Beijing-based Guodu Securities.
Sentiment is also being hit by worries over the health of China’s economy, after the release of worse-than-expected investment data on Monday, and how major central banks may act to boost global economies and prevent financial risks at upcoming policy meetings.
“Disturbed by those uncertainties, A shares may head for a correction and consolidate in a tight range, near term,” Xiao said.
The risk aversion was already “evident” across global financial markets, said Bernard Aw, an analyst with IG Group.
The US dollar declined on Monday to its lowest level in five weeks against the Japanese yen, as investors deserted riskier stocks for safe-haven assets like the yen and gold.
Gold futures for August delivery jumped on the same day to their highest settlement in five weeks, closing at US$1,286.9 an ounce.
The CBOC Market Volatility Index, a gauge of fear in the markets, also hit its highest level in three months, touching an intra-day high of 21.01.
“This week as well as next will likely see increased volatility,” Aw from IG Group said.
“The tide surrounding the Brexit sentiment can quickly shift as headline polls drive trading.”
He also said investors are closely watching the official comments made after several central bank meetings later this week, including the US Federal Reserve and the Bank of Japan, although there are no expectations for action.
“In particular, the Fed’s economic projections will be scrutinised,” Aw said.
Analysts are pointing toward haven assets, defensive sectors, as well as some cyclical sectors that are poised to benefit from China’s so-called “new economy” driven by the Internet and e-commerce.
“The gold sector will continue to gain momentum short term, as risk sentiment has risen substantially in overseas markets,” said Tang Yue, an analyst for Central China Securities, in a recent research note.
“Investors could also buy into the dip in some hot sectors, once the markets have corrected, like lithium ion batteries used in electric vehicles, and organic light-emitting diode technology, or OLED, used in making displays and lighting,” she added.
“Overall, we are advising investors to be on the defensive, short run,” Tang said.
Analysts at China Development Bank Securities, including Sun Zheng, are now recommending defensive sectors such as healthcare, utilities, and consumer stocks.
“Caution has spread across global asset markets, including A shares. Investors have been dumping riskier assets like equities.” said Sun.
“Chinese markets could face another round of heavy selling if something unexpected happens, like MSCI doesn’t include A shares in its emerging markets index on Wednesday.”
Sun is favouring consumer defensive sectors, including food and beverage manufacturers, and some cyclical stocks, such as semiconductors and electronics.
In addition, he said it’s worth looking at the alternative energy vehicle industry chain, such as manufacturers of lithium ion batteries and charging facilities, as well as sectors related to touch-screen, virtual reality , and artificial intelligence technologies.