Last May, the Straits Times Index (STI) rose to 3,464 points before succumbing to a series of falls and surges. The problem is, each successive surge levelled off at a lower point than the previous rise, and each trough was also lower than the last.
The stock market did not exactly enjoy smooth sailing over the past two months. It went through a few rounds of ups and downs, first in response to the crisis in Ukraine and then the disappearance of flight MH370. The new chairwoman of the US Federal Reserve, Janet Yellen, said that Fed will raise interest rates within six months after it completed its exit from QE3.
Based on the current pace of tapering, Fed will completely exit QE3 around the end of October and early November. Predictably, Yellen’s announcement also sent the stock market plunging.
However, the effects of these problems and bearish factors were quickly absorbed by the market. Yellen’s announcement only caused the stock market to stumble on that day and recover overnight.
The disappearance of MH370 saw only the shares of Malaysia Airlines take a pounding. This was actually music to the ears of Singapore Airlines, for it presented the national carrier the opportunity to entice Malaysia Airlines customers. In addition, Wall Street rebounded again on 14 April. It is in fact very common for the bourse to take a breather after surmounting a record high. Anyway, I am still bullish about the future of the stock market.
Oversea-Chinese Banking Corporation’s (OCBC) acquisition of Wing Hang Bank in Hong Kong can be interpreted as a ‘pain before gain’ move, with the price tag of $6.8 billion involved. Both the offer and selling prices are princely sums, and would cause OCBC Bank some short-term financial pressure. However, with the acquisition of Wing Hang, OCBC has gained a foothold in the Hong Kong market and, by extension, the mainland Chinese market. In this light, this acquisition is a good thing for OCBC in the long term. Currently, the earnings growth of DBS Bank (Hong Kong) has surpassed that of its parent company, DBS Bank (Singapore), and DBS Bank (Hong Kong) was the outcome of an acquisition made a few years back.
The proposed plan to link Hong Kong and Shanghai bourse in 2007 whipped Hong Kong investors into such a frenzy that they single-handedly lifted the Hong Kong Hang Seng Index from below 20,000 points to 32,000 points and beyond. However, after two months of mooting over the cross-market link-up proposal, then-Premier Wen Jiabao dashed their dreams with a single pronouncement. After waiting for many years, the Hong Kong-Shanghai bourse link-up proposal was suddenly resurrected, with the news personally announced by Premier Li Keqiang that the link-up will indeed be launched six months later.
Perhaps the timing back in 2007 was not yet ripe, and since there was no upper limit set, things could easily spiral out of control then. After going back to the drawing board between the intervening years, the link-up between Hong Kong and Shanghai will officially go live in six months’ time. Chinese institutional investors and individual investors with assets over Rmb500,000 can now buy Hong Kong shares directly up to Rmb250 billion in total, with a daily limit of Rmb10.5 billion. Similarly, all Hong Kong investors can buy A-shares directly up to a total of Rmb300 billion, with a daily limit of Rmb30 billion. With the trading cap in place, risk is now kept at a manageable level.
Currently, apart from earning interest in high-interest renminbi accounts, the Chinese currency favoured by the Hong Kong investors is just sitting around in the banks. When the cross-market link-up goes live, these investors with renminbi on hand can use them to buy Chinese A-shares. I believe before long, the Hong Kong media will start paying attention to the movements of these A-shares. With more avenues to invest the renminbi, banks will also be willing to pay a higher interest to entice you to set up renminbi deposit accounts, because then banks can lend the renminbi that you deposited to individuals and funds that want to invest in A-shares.
Not all Shanghai and Hong Kong shares will be allowed on the cross-market link-up. The link-up is based on certain index stocks from both Shanghai and Hong Kong markets. There are fewer Hong Kong stocks, only 266, while Shanghai is represented by 569 counters. Therefore, you should familiarise yourselves with the list of candidate stocks before jumping in.
This time round, the Shanghai-Hong Kong bourse link-up is set to be implemented, as it is integral to Chinese President Xi Jinping’s strategy to speed up economic reforms. The internationalisation of the renminbi need to pick up speed gradually, and China need to boldly explore new frontiers. Moreover, by putting a definite cap on both the total transaction amount and daily trading volume, a safety mechanism is now in place and so, things should be kept in check.
The Shanghai-Hong Kong link-up is also a morale booster for the people of Hong Kong, as they can to regain their confidence in Hong Kong as a major financial centre. For now, the scope of the Shanghai-Hong Kong link-up is limited, but I believe that, provided that all controllable factors are kept in control, China will gradually expand the scope and scale of the Shanghai-Hong Kong link-up.
This link-up may be expanded in the future to include the bourses of other major cities, like Singapore, London and New York. This is because the Shanghai-Hong Kong link-up has another important mission – to facilitate the internationalisation of the renminbi. Hong Kong has been chosen to be the pilot bourse for this endeavour.
So which are the best concept stocks for the Shanghai-Hong Kong link-up? I would recommend buying major blue-chip counters with a strong Hong Kong identity, like Cheung Kong (0001), HSBC Holdings (0005), Hang Seng Bank (0011), the Hong Kong Stock Exchange (0388) and AIA (1299).
Now that it is unlikely for war to break out in Ukraine, and the uncertainty over US rate hikes have been allayed, blue chips should look set to shake off their downtrend over the past six months and start to pick up. Over the past six months, another reason for the poor performance of the blue chips is the worldwide fad of chasing after the so-called new economy stocks. This fad has lasted for more than a year now, so it is time for funds to return to the old economy stocks, which are represented by the traditional blue chips.
As it is so for Hong Kong, it is so for Singapore too. Some counters that you should look out for: Singapore Airlines (SIA), which stands to erode away Malaysia Airlines’ market share; ST Engineering, which share price is lagging too far behind its decent business performance; Keppel Corporation, which shares have rebounded strongly and is set to test new highs; OCBC, which is finally venturing out of Singapore into Hong Kong and looks towards a brighter future.
Publish date: 17/04/14