Volatile year of epic changes in the off­ing

China Daily (Hong Kong) - - 2016-17: REVIEW & PREVIEW - -LI XIANG

Hong Hao, chief strate­gist at BOCOM In­ter­na­tional, shared with China Daily his view on the out­look for China’s stock mar­kets in 2017.

What is your view?

Con­trary to bullish con­sen­sus, our model es­ti­mates the likely trad­ing range in 2017 for the bench­mark Shang­hai Com­pos­ite In­dex to be around 3,300 +/- 500, sug­gest­ing per­haps a bet­ter year than 2016 (the same model es­ti­mated 2,900 +/- 400 for 2016 ex­actly 12 months ago) but with wider re­turn dis­per­sion to re­flect ris­ing volatil­ity. Fur­ther, two-thirds of the es­ti­mates are lower than the cur­rent in­dex level of 3,300. We re­main guarded and urge at­ten­tion on the down­side risk.

What fac­tors will in­flu­ence the A-share mar­ket the most in the com­ing year?

While the ex­pec­ta­tion is that in­fla­tion will likely rise, growth may not even­tu­ate, as in­vest­ment will likely fall with prop­erty curbs. As such, the Chi­nese econ­omy is stuck be­tween mild cycli­cal re­fla­tion and out­right stagfla­tion. It will con­tinue to tra­verse an L-shaped tra­jec­tory, as it has since 2012. The key to the A-share mar­ket trend would be whether or not Chi- na’s econ­omy will grow as strongly as ex­pected.

What are the ma­jor risks that in­vestors should be pre­pared for?

The his­toric low real in­ter­est rate feeds as­set bub­bles. More re­stric­tive prop­erty curbs are likely to come, to deal with surg­ing prop­erty prices. How­ever, the curbs will also cut liq­uid­ity and have a neg­a­tive im­pact on the eq­uity mar­ket.

Un­ex­pect­edly high in­fla­tion could be an­other ma­jor risk that may put the yuan un­der heav­ier de­pre­ci­a­tion pres­sure. If cap­i­tal con­trol is in­sti­gated to slow down on­shore ren­minbi’s de­pre­ci­a­tion, then on­shore/off­shore ex­change rates will di­verge, oblig­ing mar­ket in­ter­ven­tions such as cut­ting off­shore ren­minbi sup­ply and rais­ing off­shore ren­minbi bor­row­ing costs. But higher in­ter­est rate off­shore will even­tu­ally roil the other as­set prices, such as eq­ui­ties.

What is your trad­ing ad­vice for A-share in­vestors?

The New Year is des­tined to be one of epic changes and volatil­ity. We should fo­cus on con­vex­ity trades with op­tion-like pay­off and think in prob­a­bilis­tic sce­nar­ios, in­stead of be­ing overly en­grossed by the per­pet­ual fu­tile de­bate of “bull ver­sus bear”. We see a strength­en­ing US dol­lar, ris­ing in­fla­tion and long bond yield, as well as a weak­en­ing ren­minbi. In the first half, there should be op­por­tu­ni­ties in fi­nan­cials, ma­te­ri­als, en­ergy, in­dus­tri­als, tech and con­sumer dis­cre­tionary.

Hong Hao

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