hong kong stocks show signs of consolidation for the first time, with selling orders from overseas hedge funds increasing. what’s the future?
2024-10-03
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on october 3 (thursday), the a-share market continued to be closed for the holiday. hong kong stocks opened lower and moved lower, retreating after rising for many consecutive days. in the afternoon, hong kong stocks rebounded in deep v. as of the close, the hang seng index fell 1.37% to 22136, and the hang seng technology index fell 3.3% to 4986.87. overseas institutions said that profit-taking and selling increased across various products.
on october 2, a reporter from china business news found that due to the holiday closure of a-shares, many a-share investors turned to more flexible hong kong stocks for trading. as of the close of the day, the hang seng index rose by more than 6% and the hang seng technology index rose by more than 8%. . the hong kong stock market witnessed an epic scene - the wind chinese brokerage index soared 35%, hitting another record high, shenwan hongyuan hong kong rose 206%, and china merchants securities rose more than 80%.
in the future, the situation in the middle east, friday's u.s. non-farm payrolls data, the u.s. election, etc. will continue to affect the market.
profit-taking and short-term selling increase
after a surge, the market seemed to be returning to rationality on thursday. according to information from the goldman sachs trading desk, today we saw the first signs of consolidation since the rise in a-shares and hong kong stocks last week. it will be of great reference to observe the resilience of this rise and the intensity of "buying on dips". so far, institutions are seeing profit-taking and increased selling across products:
options: closing of in-the-money calls and call spreads (a fraction of last week’s purchases); futures: investment banks are seeing increased selling for the first time since the rally began; spot: from long-term investors and hedge funds selling increased, buy orders were put on hold this morning, and long sell orders went from outperforming the market to in line with volatility (a reversal from the previous day's situation).
since the end of august, the hang seng technology index has soared nearly 44%, and it is not surprising to see consolidation. david scutt, senior strategist at gain capital group, told reporters that in fact, copper and iron ore futures, which are closely related to china's recovery expectations, are still well below the highs at the beginning of this week, while usd/offshore rmb has rebounded back to 7.0000 above, this may be a warning sign that the optimism in the stock index has failed to extend to other markets. as of 16:50 on october 3, beijing time, usd/cnh was trading at 7.0436.
in addition, he also mentioned that the hang seng index is close to rising resistance. “how sudden the recent gains have been, this likely reflects the impact of short covering and massive capital inflows. looking higher, prices found resistance early on tuesday at 22795, which was a double top formed in january 2023. a breakout of that 24900 will be the next target. now the index is clearly suppressed by resistance, and the downward support is around 21066, which is where the rally stalled last week and is also the support and resistance at the beginning of 2023.”
in the bull market driven by funds, the changes in funds are also the key to the future. considering that this rally was largely driven by reallocated funds, here is a summary of stock positions from mutual funds, hedge funds, retail investors, and southbound funds:
goldman sachs trading desk information shows that in terms of long-term mutual fund positions (as of the end of august), before this rise, asian and global fund exposure to china reached the lowest level in the past decade, and mutual fund cash levels also fell. close to multi-year lows, these institutions generally acted slowly and did not increase their positions significantly this time, which may mean that if the market continues to rise, funds from other markets may rotate into china.
“we have seen long-term investors buying into high-quality chinese hot stocks over the past few days, but given the relative performance gap, there may be more buying demand from active index-tracking funds to prevent further gains. there are insufficient positions," a trader from a us investment bank told reporters.
according to a rough estimate based on epfr data, the global mutual funds surveyed (with an asset management scale of approximately us$3 trillion) are overall underweight china by 3%, which means that long-term investors need to buy approximately 100 billion in a shares, h shares and adrs. dollars to return to a neutral configuration.
looking at hedge fund positions (as of the end of september), net allocations have increased significantly over the past two weeks. overall allocation reached 5.9% at the end of september (at the 32nd percentile over 5 years), an increase of 1.2% for the month; net allocation reached 9.2% (at the 49th percentile over 5 years), an increase of 2.4% %. during previous increases (china's post-pandemic reopening, 2022 politburo meeting), institutions observed net allocations increasing by 3% to 6%, and overall allocations increasing by 1.5% to 2.5%.
in terms of southbound funds, there has been overall net inflow since september, and it has been net buying for 15 consecutive months (the last net selling month was june 2023). year to date, southbound funds are the largest buyers in asia, with net purchases reaching us$63 billion. the participation of southbound funds in hong kong has steadily increased. so far in 2024, the proportion of southbound capital inflows in hong kong’s total trading volume has reached a new high of 16%. southbound funds will restart trading along with china a-shares on tuesday, october 8.
the intensity of fiscal stimulus determines subsequent market trends
currently, there is indeed an outflow of funds from the stock markets of india, south korea, and japan, allocating to the chinese stock market with lower valuations. compared with the nearly 25 times earnings ratio of the indian stock market, msci china is only about 11 times. the price-earnings ratio during the most prosperous trading period in the past few years only 18 times. currently, in addition to cheap stock market valuations, china's fiscal stimulus policy is also expected.
"india's valuation is indeed a bit too high, china's taiwan and south korea's stock markets are affected by the downturn in the semiconductor and technology cycles, and the slowdown in the u.s. economy may also affect the u.s. and global stock markets." miao zimei, head of greater china equities at janus henderson investors, told the article a financial reporter said. however, everyone is also paying attention to subsequent policy measures, especially whether the intensity of fiscal stimulus will meet expectations.
morgan stanley said chinese stocks could rise a further 10% to 15% if the chinese government announces more spending measures in the coming weeks. expectations of further fiscal expansion are back on the table, causing investors to view china through a reflation lens for the first time in a long time, an attitude they last viewed early last year. at that time, investors gave the msci china index an expected price-to-earnings ratio of about 12 times.
according to the reporter's understanding, major domestic and foreign investment banks' expectations for fiscal stimulus are that additional government bond issuance is expected to be approved in the fourth quarter, and fiscal expenditures may be as high as 3 trillion yuan.
lu ting, chief economist of nomura china, said in a report on october 3 that for investors, after enjoying the initial carnival, they especially need to be prepared for adverse scenarios. in a better scenario, policymakers would pay close attention to brewing bubbles and take timely measures to calm the frenzied stock market. at this time, the scale and pace of fiscal stimulus may be more cautious, while the government turns its energy to more difficult tasks including cleaning up the chaos in the real estate industry and restructuring the fiscal system; under the baseline scenario, a smaller-scale stimulus may be seen bubbles and potential bubble bursts. in this case, policymakers may seek to introduce fiscal measures to stabilize demand and maintain basic local government operations, but may not resolve any serious structural problems.
how policymakers navigate uncharted waters should be closely watched in the coming months. lu ting believes, “we believe that policies will initially focus on three areas. first, in response to the second round of shocks, the central government will increase fiscal transfer payments to local governments; secondly, the central government may accelerate the construction of major cross-regional projects to improve third, the central government may consider increasing social security expenditures for poor groups. he believes that in the future, the central government may eventually become the "builder of last resort" and directly provide funds for residential projects that have been pre-sold but delayed in delivery. however, the scale and pace of policy may be more uncertain. the scale of incremental stimulus may eventually be limited to 3% of gdp per year, and the market should pay more attention to the specific content of stimulus measures. "
(this article comes from china business news)
