Hong Kong is the World’s Top Stock Market
$HSI, $TCEHY, $PNGAY, $AAPL, $FB
Among the world’s biggest stock markets, there have not been any better investments YTD than Hong Kong’s Hang Seng Index
But under the surface of that 25% rise, gains are getting more concentrated, and that means for some shares, volatility is on the rise.
Take one of the Hang Seng’s heaviest weighted stocks, Tencent Holdings Ltd. It’s the 2nd-best performer this year with a 64% rise, accounting for almost 25% of the index’s gain. And its 30-day volatility has jumped 51%, as price swings across the index grow ever more muted.
Mainland Chinese participants are causing this action, favoring Hong Kong’s biggest shares as they funnel cash into the city through exchange links.
While that creates opportunities for stock pickers, some strategists see the lack of breadth as a risk for passive money too, in that it is a sign of a fragile rally.
There are funds coming from China and they are buying into well-known stocks from their point of view, like Tencent or Ping An.
The Hang Seng Index has moved quite considerably upwards but then the 2nd or 3rd liners have not been able to follow, the rally’s reliance on just a few stocks means “an external shock would give the market a good excuse for a correction.
The Hang Seng Index’s run North in Y 2017 marks a departure from years of underperformance Vs global equities, with the Hong Kong measure delivering more than 2X the S&P 500 Index’s gain amid signs of a stabilizing Chinese economy and brighter earnings prospects.
A similar pattern is happening in the US, where rallies in giant companies like Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) are dominating indexes, and if this is something to worry about is a Big Q.
Overall it is usually not a good sign for there to be a narrowing of the market in a Bull market, it often means that participants are running out of issues to buy.
The buying habits of Chinese Mainland investors are having an impact.
Mainland investors have purchased a net US $37-B of Hong Kong stocks through Shanghai and Shenzhen trading links this year. Among the most actively traded in recent months include Tencent, Ping An, China Life Insurance Co. and HSBC Holdings Plc.
Crowd-following quants are also part of the story, as systematic investors are targeting Tencent and some Chinese bank stocks and they tend to raise volatility on a sub-index or a company level, while suppressing it on an overall index mark.
Narrow market leadership increases volatility in those stocks, and signals that maybe the markets are getting a bit high and needs to “snap back to the line”. That being the case I expect some pullback in Q-3.
How about this, “Maybe sell in August, buy back in November” ?
Remember, always take what the market gives.
Have a terrific week.