Hong Kong shares lose appeal as Chinese equities stabilise

The divergence between China and Hong Kong equities continued to widen at the start of the week, as the conditions have largely faded.

Hong Kong
Source: Bloomberg

During the Chinese stock rout, investors turned to H-Shares which are less vulnerable to mainland deleveraging, while their cheaper valuations also make a more compelling investment.

China’s support measures to stabilise Chinese equities appeared to have taken effect. While the Shanghai Composite was unable to make any meaningful rally above the 4000 handle, downsides were mostly cushioned by state buying, among other initiatives. Continued stability in the markets will likely restore investor confidence.

We are already seeing margin lending back on the rise. Data from the China Securities Finance Corp (CSFC) showed that total outstanding margin loans rose nearly 6% or CNY 1.37 trillion as of 13 August 2015, from the lows of CNY 1.29 trillion on 3 August 2015.

However, I feel the authorities will keep the increase in margin trading in check, given that deleveraging was a major contributor to the recent stock slump. That said, a large portion of the rise in margin loans could have likely originated from stock purchases by the CSFC, as part of the government’s efforts to steady the equity markets.

As such, the probability of a sharp reversal in margin debt would be even lower since the state agency does not face the disadvantages of a retail trader. Furthermore, China’s securities regulator said that the CSFC will continue to stabilise the stock markets for a couple of years.

Apart from China’s stability, investors are unwinding Hong Kong stock positions in anticipation of the normalisation of US interest rates sometime this year. Higher borrowing costs are bad for property companies, as it would be costlier to finance projects.

Property-related public companies comprise a quarter of the MSCI Hong Kong index. Furthermore, China’s surprise devaluation last Tuesday may trim the purchasing power of Chinese visitors, which would add to weak retail sales in Hong Kong.

Asian currencies lower

In the Asian currency market, yuan remained relatively steady after a little changed PBOC fixing. USD/CNY mostly traded within 6.3940-6.3950. Notwithstanding a calm renminbi, Asian currencies were under pressure, with several units affected by a Morgan Stanley report outlining the 10 economies that are susceptible to China’s slowdown.

Taiwan, Thailand and Singapore were among the 10. The Taiwanese dollar (TWD) was the worst performer today, declining 0.9% against the greenback as of 4.15pm SGT. The ringgit remained soggy, although I suspected official bids have likely stalled the currency’s decline. USD/SGD also struggled to advance beyond 1.4100.

Major FX pairs are mostly stuck in range trading, amid low volatility. Most market participants are eyeing the FOMC minutes and US inflation data this Wednesday for trading catalysts. Should the Fed officials indicate worries over falling inflation expectations and the impact of a stronger US dollar, we should see a fair amount of market volatility filtering through as uncertainty mounts.


Noble intentions

The embattled commodity trader, Noble Group, held an investor day event today, where CEO Yusuf Alireza said that the company can deliver over $2 billion of operating income in the next three to five years. He added that the revenue forecasts were based on the assumption of no new investments. It appeared that Mr Alireza’s comments gave a little boost to Noble share prices, which trimmed losses to around -4% as of 4.38pm SGT.

At the moment, liquidity woes may deter investors from purchasing the stock. Moody’s noted last week that the Noble’s liquidity profile has deteriorated compared to the last few years. It specifically pointed out that the company may have trouble meeting short-term debt obligations. According to Moody’s, although Noble has $1.1 billion in cash and $1.8 billion in credit lines, this is insufficient to service the $3.5 billion debt due to mature over the next 12 months.

Meanwhile, the Straits Times Index (STI) registered an annualised total return of 7.8% over a 10-year period, according to SGX. This is higher than Hang Seng's 7.6%, Dow Jones’ 5.9% and Nikkei 225's 4.1%. The Singapore bourse operator added that the ETF traded value was up 37% year-on-year for the period of Jan-Jul.

However, I feel that current conditions have become unfavourable for Singapore stocks. The STI saw a reversal in April after reaching a high of 3539.95, switching to a downtrend. The Index came under heavy selling pressure in middle of July, losing around 300 points within four weeks, and is now over 8% lower on the year. In comparison, China and Japan are up 15.4% (CSI 300) and 18.2% (Nikkei 225).

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