China and Hong Kong stocks to dip on policy, stronger yuan
China and Hong Kong stocks will likely to decline in the next three months due to the regulatory crackdown and a stronger yuan, says Credit Suisse.
The Swiss bank said on Monday that as Chinese policymakers were likely to continue its deleveraging of the financial system, stocks of Chinese companies listed in Hong Kong would correct in the next three months before rebounding to current levels.
Stocks of Hong Kong local companies were also likely to drop in the near term due to weaker inflow of mainland funds. The Hang Seng Index was projected to taper to 25,000 points in three months, before rising to 26,000 in 12 months. The index is now at 25,871.89.
In a report, the bank was also downbeat on the corporate earning outlook, and projected an earnings per share growth of 8.3 per cent over the next 12 months.
“Southbound flows from mainland China to Hong Kong are likely to taper in the near term as speculators position for short-term strength for the yuan,” said John Woods, the bank’s chief investment officer for Asia-Pacific in a media briefing.
The continual weak US data could veer the Fed from its rate hike path, and the renewed US political uncertainty could be viewed a risk to the positive view on the US dollar. At the same time, as the yuan strengthens, mainland investors had less motivation to invest in overseas assets to hedge against a depreciating yuan, Credit Suisse said.
The bank expected the yuan to appreciate by 2 per cent from the current level of 6.82 per dollar over the next 3 months to reach a target rate at 6.70. But it retained a negative view with a revised depreciation forecast of 7.20 in the next 12 months.
Its targets for the Hang Seng China Enterprises Index were 10,200 in three months, and 10,550 in 12 months, compared to the current 10,530.66 level.
However, downside support was seen because of policymakers’ focus on active management of financial markets ahead of the political reshufflein Chinalater in the year.
“We see current levels is a good time to book profit in the market and wait for lower levels,” Woods said.
The financial sector was also expected to outperform the market as they benefit from higher bond yields, Credit Suisse added.