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Investors at a stock brokerage in Hangzhou on February 11, 2019. Contrary to global conventions, China’s stock market uses red to denote gains and advances, choosing to illustrate declines and losses in green. A wall of red is a welcoming sight for Asia’s largest capital market, which spent 2018 as the world’s biggest loser. In the first quarter of 2019, stock indexes of Shenzhen, Shanghai and Hong Kong were among the world’s biggest winners. Photo: Xinhua

Stock indexes of China, Hong Kong ended the first quarter with spectacular surges. Can they repeat the feat next three months?

  • Shenzhen’s Composite Index recorded the best quarter in years, while benchmarks of Shanghai and Hong Kong soared
  • Outcome of US-China trade war will either make or break markets in the second quarter, analysts say

Stock indexes of Hong Kong, Shanghai and Shenzhen were among the world’s biggest winners in the first quarter, after spending 2018 near the bottom of the pile. Now comes the hard part: repeating the feat in the next three months.

Shenzhen’s Composite Index soared 33.7 per cent in the first quarter, the top gainer out of 94 stock benchmarks tracked by Bloomberg, while Shanghai’s main gauge jumped 23.9 per cent. In Hong Kong, the Hang Seng Index rose 12.4 per cent to close the quarter at 29,051.36.

“The incredible run-up has reflected all the good news in the first quarter,” said Ronald Wan, non-executive chairman of Partners Financial Holdings.

That include improving liquidity in China and beyond on the back of the government’s monetary easing policies and the decision by the US Federal Reserve to slow its pace of raising interest rates. Progress in trade negotiations and China’s promised fiscal stimulus, including a planned 2 trillion yuan (US$297 billion) tax and fee cut this year, also lifted sentiments.

For the momentum to hold, investors must see substantial improvement in company earnings and the real economy, Wan said.

“Better liquidity conditions won’t push up the markets beyond limits,” Wan said. “The market’s performance will hinge on whether the positive signals and promises will materialise in the second quarter.”

US-Chinese trade negotiators meeting in Washington DC on February 21, 2019. Photo: AP

That means the Hang Seng could surpass 30,000 again if a resolution is reached in the US-China trade talks. Francis Lun, chief executive officer at Geo Securities, echoed the view.

“The US-China trade talk will dictate the second quarter,” Lun said, describing the market sentiment as “guarded optimism.”

Conversely, Hang Seng could plunge by 17 per cent to 24,000, if a deal is not reached on the trade war between the world’s two largest economies, Lun said.

Lots of bright spots still remain in the markets despite the uncertainties.

Technology stocks, specifically gaming and social media giant Tencent Holdings and stocks related to 5G telecommunications are among the top picks for investors.

After struggling amid a crackdown by Beijing on online gaming, Tencent had dug itself out of its slump, rising 15 per cent to close the first quarter at HK$361. The quick turnaround surprised a lot of people, Lun said, and investors now believe the company has put its worst days behind it.

Analysts seem to agree, with 54 recommending that their clients “buy” the stock, with six calling for a “hold,” while nobody has a “sell” rating. The stock may rise another 14 per cent to HK$412.28, according to the consensus price target tracked by Bloomberg.

There is room for optimism, as China’s government is likely to double down on investing in 5G, which will benefit companies that are involved in the technology.

Once the US-China dispute is resolved, “the [Chinese] government is likely to further invest in 5G and speed up the launch of 5G,” said Kenny Tang Sing-hing, chief executive of China Hong Kong Capital Asset Management.

Infographic: 5G offers world’s biggest mobile market a gateway to the industrial internet

ZTE, China’s second-largest telecom equipment maker listed in Shenzhen and Hong Kong, validated investors’ hopes on Thursday by projecting a first-quarter net profit of between 800 million yuan and 1.2 billion yuan, higher than market expectations.

The company suffered a huge blow last year when the US government temporarily banned companies such as chip maker Qualcomm from selling to ZTE. The technology company has fully recovered from the ban and will enter a new phase of profit growth, according to Sinolink Securities.

On top of technology stocks, which are more of an aggressive play, investors are also likely to benefit from adding more defensive stocks such as infrastructure company to their portfolio, according to Wan.

Infrastructure stocks may outperform if China falls back to the old way of investing in building bridges and highways to support the economy later into the year, he said.