16 AUGUST 2013
Dr Chan Yan Chong’s Column
By Dr Chan Yan Chong
After a good rally, markets finally gave in to a correction last week largely due to some concerns in the US stock market after several Federal Reserve officials unequivocally talked about a reduction in the bond buyback programme as some felt that September could spell the beginning of the end of Quantitative Easing (QE) III while others spoke of October as a possible date. Is the day drawing near?
To the surprise of many investors, the end of QE III should strengthen the US dollar but the greenback fell against the yen during the past fortnight so much so that it created some hype among the media. The rise in the yen sparked off a correction in the Nikkei 225 as a strong yen is contrary to Abenomics, which aims to allow the yen to weaken so as to boost exports.
The US dollar weakened against the major currencies while causing gold and oil prices to rise. What is the Federal Reserve’s game plan? Why did the stock market and foreign exchange market trade contrary to popular beliefs?
I believe that Ben Bernanke has been trying to maintain the supremacy of the US dollar as continuing with QE III will weaken the greenback and may cause the US to lose its status as the sole superpower in the world.
On 5 August, the share price of HSBC (HK: 005) fell despite reporting a 23 percent increase in net profit to US$10 billion. Was it a classic sell on news or did the results not meet with expectations? Analysts started downgrading HSBC but I maintain steadfast in my HSBC holdings. It is likely that analysts were too optimistic hence they were disappointed when the bank, which has operations all over the world, raised concerns about the health of the global economy. Its European operations have turned in a profit from a loss position while the end of the European debt crisis could mean that the global economy is on the mend.
After being mired in the crisis for two years, it is unlikely for the Euro to replace the status of the US dollar which has managed to maintain its hegemonic position after firing up the printing machines. After the Wall Street speculators attacked the Euro, focus now turns to China once again for not allowing the yuan to appreciate. There are bad press about China on a daily basis especially from the western media who likes to talk about a hard-landing for the Chinese economy.
What are their motives? Where does the media get the information from? International speculators? Then what is their purpose for doing so? It is obvious that their moves are aimed at depressing stock prices by spreading malicious rumours followed by buying on the cheap when the fear factor is at the highest. Why should we worry about the Chinese economy when everything is in the good hands of President Xi Jinping who has now advised everyone to bite the bullet while China seeks reforms?
The HSBC PMI showed that the index fell to 47.7 from 48.2 last month – a 11-month low. This caused a selloff in the Hong Kong stock market but it soon recovered despite the Chinese government maintaining 7 percent economic growth rate is achievable and must be achieved. Should the growth rate drop below 7 percent, the Chinese government will definitely do its utmost to spur the economy. From now on, investors must learn to buy on dips because China will continue to grow by at least 7 percent.
On the whole, the stock market is recovering and the Hang Seng Index has surged more than 2,000 points from its low in June. Apart from the traditional market movers, insurance and gaming stocks, too, rose quickly and may hit fresh highs. The Shanghai Composite Index jumped 2.4 percent on 12 August to hurdle past 2,100 points to reach a two-month high after the Chinese government promised a minimum growth rate of 7 percent.
What is low can go even lower, so how do we know when is the low? It is hard to buy at the lowest hence patience is needed even if you have bought low but the stock went even lower. However, we must only buy quality stocks if we chose to adopt this strategy. For many years, stocks related to infrastructure development and building materials have been hit by oversupply that can only be solved by the market itself. The weaker companies may fold and oversupply will vanish once this happens.
Tencent Holdings (HK: 0700), which listed less than a decade ago, has risen more than 100 folds. I did not buy into this stock market darling because I am a Warren Buffett fan who does not buy technology stocks. These growth stocks are often associated with high price-earnings ratio and China Mobile (HK: 0941) is one of them. Despite making more money than yesteryears, its share price has lost more than half the HK$150 it reached back then. Once a high growth stock becomes a normalized utility stock, it can no longer justify the high price-earnings ratio hence the fall from grace.
It is hard to put all your money into one basket because no single stock can rise forever. Once the stock falls, should we hold, buy more or sell? Investors have been criticised for making pennies and losing dollars, which is unfair because fear plays a huge part in investments. If stocks were to rise forever, everyone will be making billions and no one will see a 30 percent profit turn into a 30 percent loss for not knowing how to take profit. Should we cut loss if the stock falls below our buy price? It is perhaps the best to buy Hong Kong property stocks because they have neither rise nor fall over the long period of time.
My preferred stock AIA (HK: 1299) has hit new highs! It is a stock worth keeping for a decade but I do not expect it to become another Tencent Holdings. It is a steady and high growth stock that made a 34 percent increase in profits due to Hong Kong and Singapore focusing on wealth management, which is linked to investment-linked insurance products. I believe more and more China clients will be giving business to wealth management companies in both Hong Kong and Singapore.
Publish date: 16/08/13