The big tus­sle over hit­ting the 7.5 % growth tar­get

China Daily (Canada) - - HONGKONG - By OSWALD CHAN in Hong Kong oswald@chi­nadai­lyhk.com

For the rest of the year, lag­gard eco­nomic growth on the main­land, the grad­ual ta­per­ing of the US mon­e­tary quan­ti­ta­tive eas­ing (QE) pol­icy and weak Hong Kong eco­nomic data could im­pede the Hang Seng In­dex’s (HSI) up­ward po­ten­tial.

Whether the cen­tral govern­ment can stick to its tar­geted eco­nomic growth of 7.5 per­cent for 2014 has been a topic for hot de­bate — the na­tion’s eco­nomic growth in this year’s first quar­ter man­aged to hit 7.4 per­cent.

The cen­tral govern­ment had, in the past two months, in­tro­duced min­is­tim­u­lus mea­sures, such as in­creas­ing in­vest­ment in trans­porta­tion, so­cial hous­ing and the util­ity sec­tor. Lo­cal gov­ern­ments have re­laxed hous­ing pur­chase curbs to shore up the main­land’s property mar­ket.

At the end of May, the State Coun­cil pledged to lower fi­nanc­ing costs for com­pa­nies, in­crease fi­nanc­ing sup­port for the ser­vices sec­tor and strengthen re-lend­ing sup­port for small firms and project-spe­cific fi­nan­cial bonds, in or­der to sta­bi­lize eco­nomic growth on the main­land.

The cen­tral bank — the People’s Bank of China (PBOC) — un­veiled the lat­est RMB re­serve ra­tio (RRR) in May that’s es­ti­mated to in­ject 70 bil­lion yuan into the main­land bank­ing sys­tem. CCB In­ter­na­tional Se­cu­ri­ties (CCBIS) has fore­cast a 0.5-per­cent cut in RRR, or a 0.25-per­cent in­ter­est rate cut in the third quar­ter that would al­low banks to ac­cel­er­ate lend­ing in the sec­ond half of the year.

But, de­spite the string of eco­nomic sta­bi­liza­tion pack­ages, prospects for the main­land’s eco­nomic growth are up in the air.

“The bal­ance of risk to growth is still on the downside. For these (eco­nomic) signs of sta­bi­liza­tion to turn into a sus­tain­able re­cov­ery, in­vest­ments need to pick up. And for that to hap­pen, bor­row­ing costs need to come down fur­ther. It’s there­fore en­cour­ag­ing to see the mon­e­tary pol­icy in­creas­ingly be­com­ing more flex­i­ble to sup­port growth,” said HSBC Greater China econ­o­mist Ju­lia Wang.

“Downside risks to growth re­main sub­stan­tial. The still unim­pres­sive new ex­port or­ders in­di­cate that re­cov­ery in global de­mand has yet to turn con­vinc­ing. Do­mes­ti­cally, a more pro­nounced down­turn in real es­tate would lead to a sig­nif­i­cant spill-over into other sec­tors and over­all growth,” Royal Bank of Scot­land chief China econ­o­mist Louis Kuijs said.

Sec­ond, con­tin­ued US ta­per­ing of its mon­e­tary QE pol­icy is also tak­ing a toll on in­vest­ment sen­ti­ment in the lo­cal eq­uity mar­ket.

Ear­lier this month, the US Federal Re­serve (Fed) trimmed its bond­buy­ing pro­gram for the fourth time, re­duc­ing its bond-buy­ing amount to $35 bil­lion monthly — down by $10 bil­lion a month. The Fed be­gan un­wind­ing its QE pro­gram in De­cem­ber last year from the orig­i­nal bond-buy­ing level of $85 bil­lion per month. The fi­nan­cial mar­ket ex­pects the Fed to stop bond pur­chases com­pletely by the end of this year.

The only un­cer­tainty that re­mains is when will the Fed raise in­ter­est rates — a move that defini­tively will in­duce Hong Kong in­ter­est rates to fol­low suit, and this will have a neg­a­tive spillover ef­fect on the lo­cal eq­uity mar­ket. Un­der Hong Kong’s Linked Ex­change Rate Sys­tem, the city’s in­ter­est rates will go up if US in­ter­est rates climb. No rate hike hint

The US Fed has pre­dicted that in­ter­est rates are not likely to move up­wards un­til mid-2015, based on US eco­nomic data on la­bor mar­ket con­di­tions, in­fla­tion­ary pres­sures and over­all fi­nan­cial de­vel­op­ments.

Third, the HKSAR’s fal­ter­ing eco­nomic growth is cre­at­ing head­wind for the lo­cal stock mar­ket.

The city’s bleak eco­nomic growth ex­pec­ta­tions for 2014 emerge from the muddy con­flu­ence of fee­ble re­tail sales, ane­mic ex­ports and a po­ten­tial hous­ing bub­ble — fac­tors that have al­ready started a con­tin­u­ous eco­nomic growth down­ward cy­cle in Hong Kong since 2011.

Eco­nomic growth in 2012 stood at 2.9 per­cent and 1.5 per­cent last year. Eco­nomic growth rates in the past five years have been much lower than the 10-year aver­age of 4.5 per­cent. The sit­u­a­tion did not im­prove dur­ing the first quar­ter of 2014, when the city’s econ­omy grew by only 2.5 per­cent — be­low the 2013 fourthquar­ter rise of 2.9 per­cent.

Clouded by these un­cer­tain­ties, Hong Kong’s eq­uity mar­ket, ba­si­cally, is trad­ing within a nar­row range in the first half of this year (See ta­ble be­low) and the mar­ket mo­men­tum is pre­dicted to re­main slug­gish in the next six months.

“De­faults of lo­cal govern­ment debts on the main­land, pos­si­ble US in­ter­est-rate hikes in the sec­ond/ third quar­ter of 2015 and the po­lit­i­cal ram­i­fi­ca­tions of the ‘Oc­cupy Cen­tral’ cam­paign may cre­ate down­ward pres­sures on the share mar­ket,” Ten­gard Fund Man­age­ment in­vest­ment man­ager Patrick Shum told China Daily.

He pre­dicted the HSI will re­main in a nar­row trad­ing range of be­tween 21,000 and 24,000 points in the com­ing six months. “In­vestors have to adopt an even shorter men­tal­ity in in­vest­ing in lo­cal shares, like a guer­rila fighter. The in­vest­ment time hori­zon may be as short as just one or two days. There’s re­ally no longterm in­vest­ment any­more,” Shum noted.

CCB In­ter­na­tional Se­cu­ri­ties (CCBIS) es­ti­mates the Hong Kong eq­uity mar­ket should trade be­tween the range of 19,600 and 23,500 points by yearend. Downside risks would come from fasterthan-ex­pected property in­vest­ment de­cel­er­a­tion, fi­nan­cial de­faults and pre­ma­ture QE ta­per­ing in the US.

Ac­cord­ing to CCBIS, the Hang Seng China En­ter­prise In­dex looks more at­trac­tive than the HSI in terms of val­u­a­tion re­cov­ery in the sec­ond half of this year. The bro­ker­age house as­sessed HSI’s P/E ra­tio in 2014 at 10.8 times and the HKCEI’s at 7.3 times for the same pe­riod.

“Long-term out­per­form­ers in the new econ­omy, in­vest­ment op­por­tu­ni­ties aris­ing from the ‘through train’ be­tween Hong Kong’s bourse and the main­land’s A-share mar­ket, as well as state-owned en­ter­prises’ (SOEs) re­form ben­e­fi­cia­ries are the three ma­jor in­vest­ment themes for the lo­cal share mar­ket,” CCBIS Man­ag­ing Di­rec­tor and Co-Head of Re­search Peter So said.

UBS holds a neu­tral rat­ing on the Hong Kong share mar­ket, be­liev­ing there’s no cat­a­lyst to fuel a share mar­ket surge in the next six months.

How­ever, UBS is bullish on con­glom­er­ates, Hong Kong-based banks, gam­ing oper­a­tors, cap­i­tal-goods com­pa­nies and high-yield, real-es­tate in­vest­ment trusts (REITs) be­cause these shares can of­fer growth and in­come po­ten­tial as the eco­nomic cy­cle im­proves. Eq­ui­ties ‘un­der-weighed’

But, Gold­man Sachs is even more bear­ish, say­ing Hong Kong eq­ui­ties should be un­der-weighed, given val­u­a­tions and tight­en­ing global fi­nan­cial con­di­tions.

Ac­cord­ing to the in­vest­ment bank, the lo­cal eq­uity mar­ket is trad­ing at 14.9 times price-to-earn­ings (P/E ra­tio) and 1.3 times price-to-book (P/B) ra­tio — higher than that of the Asia Pa­cific re­gion, ex­clud­ing Ja­pan (with a 11.9 times P/E ra­tio and 1.6 times P/B ra­tio). A higher P/E ra­tio and P/B ra­tio sug­gests the share mar­ket val­u­a­tion is ex­pen­sive and the mar­ket may prob­a­bly fall af­ter­wards.

How­ever, not all an­a­lysts con­cur. Core Pa­cific-Ya­maichi head of re­search Cas­tor Pang is bullish about the lo­cal stock mar­ket for the sec­ond half of the year. “Fixed-as­set in­vest­ments on the main­land will pick up in the com­ing six months and, with a pos­si­ble US in­ter­est-rate hike in 2015 and Hong Kong’s share mar­ket val­u­a­tion likely to be re-rated, the lo­cal stock mar­ket should turn stronger in the com­ing six months,” Pang told China Daily, adding that the HSI in the sec­ond half of 2014 should hover be­tween 24,200 and 24,800 points.

Dickie Wong, re­search di­rec­tor at Kingston Se­cu­ri­ties, reck­oned that the HSI could hit 25,000 points by the end of this year, or 9.3 per­cent upside po­ten­tial from the cur­rent trad­ing level, depend­ing on the speed and vol­ume of cap­i­tal flow into the lo­cal share mar­ket.

“Given the fact that the main­land’s econ­omy is grad­u­ally im­prov­ing, the US be­ing un­likely to raise in­ter­est rates be­fore mid-2015, and Hong Kong-listed shares not re­ally in­flu­enced by lo­cal eco­nomic growth fig­ures (their businesses have al­ready been di­ver­si­fied into the main­land and other coun­tries), cap­i­tal in­flow is the only fac­tor that can boost the share mar­ket,” Wong said.

“The Shang­hai-Hong Kong Stock Con­nect, to be launched in Oc­to­ber, will at­tract more cap­i­tal from the main­land to pur­chase Hong Konglisted shares, thus in­ject­ing much­needed cap­i­tal to but­tress the mar­ket,” Wong added.

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