PRIVATE EQUITY | Staff Reporter, Hong Kong

3 major themes to watch for in Hong Kong equity market next year

Will it be able to keep its momentum?

CCB International Securities Limited (CCBIS) has recently released its 2014 Investment Strategy. A related presentation was hosted by Dr. Peter So, Managing Director and Co-head of Research, and Dr. Eliza Liu, Deputy Head of Research and China Economist on 28thNovember at CCBIS. 

According to CCBIS 2014 Investment Strategy, both the Hang Seng Index and Hang Seng China Enterprises Index underperformed against other major stock markets in developed countries in 2013.

This is a reflection of China’s decelerating economy and the systematic risk associated with the country’s current growth track. Going into 2014, the momentum for the Hong Kong equity market will be directed by three major themes: ROE outperformers, cyclical corporate earnings recovery, and beneficiaries of government reform.

“We have developed two scenarios for the overall 2014 HSCEI forecast, targeting at 13,100 and 10,600 for base and bear cases respectively at the end of the year, which mainly reflects the impact of flat risk premium and market risk free rate,” says Dr. So.

“For the base case, we expect positives brought by government reform balanced by downside risk from China’s further economic slowdown in 2014. This in turn lowers the risk premium as investor confidence in China’s long-term growth story next year will increase once more concrete reforms are introduced.

Our bear case has factored in the downside risks from our assumption of slower-than-expected Gross Domestic Product growth and premature QE tapering in the US.”

Dr. Liu adds, “We forecast national GDP growth will drop slightly from 7.6% YoY in 2013 to 7.4% YoY in 2014, based on the combined effect of slower fixed asset investment growth of 19% YoY and higher exports.

In view of the upward trends in Consumer Price Index and Producer Price Index as we head towards 2014, we can expect nominal GDP to grow from 9.5% YoY in 2013 to 10-11% YoY in the coming year.

The widening gap between PPI and Purchasing Price Index of Raw Material, Fuel and Power should also support gross margin improvement for industrial companies.

We expect leading players in household appliances, entertainment and leisure, automobiles, software and IT services, oil and gas, healthcare and IT hardware stocks will be benefited by ROE enhancement.” 

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