Hong Kong market is bad. Hang Seng Index is below 18,800 and people are now saying maybe we test the 14597.31 low in Oct 2022. I recall Oct 2022 low was printed with:
1) fear of Mainland-Taiwan tension
2) President Xi announcing his new leadership team in Communist Party Congress
3) high inflation in US and Europe and US FED rate hikes
4) a cold winter with no gas in Europe
None of the above became a real issue and today, we are worry again(?):
a) US stock market correction. US S&P has been above 4,000 year-to-date despite Morgan Stanley US equity strategist Michael Wilson kept saying S&P could fall to 3,000.
https://www.cbsnews.com/news/morgan-stanley-stock-outlook-20-percent-drop/
b) Europe stock market correction. Eurostoxx 50 is up 16% in one year. N225 is up 15% in one year. EUR has strengthened against USD year to date and currently at 1.07 vs last year Sep low of 0.96. JPY has weakened from 128/130 to 140.
c) US Fed rate is at 5-5.25% and CPI is still going up. So rates may stay at this current level. This is a real issue and affects business that is leverage.
d) US Treasury yield curve is inverted and this predicts a recessionary future. 5% rate for 1 year or shorter. 3.7-4.3% for 2-30 years. It is inverted but not that inverted. CME FedWatch tool is implying 28% chance for Fed Rate to be at 3.75-4% in Jul 2024. This could make the yield curve flat. Plus US Treasury is not keen to pay high coupon for their long dated bonds.
https://www.ustreasuryyieldcurve.com/
e) US Debt Ceiling => technical default for a few days?
f) Hang Seng Index is down 7.3% in a year and many ex-HOT stocks testing Oct 2022 low
I would only worry about the last two items.
Short term volatility from (e) Debt Ceiling saga could indeed cause a roller coaster to stocks and bonds market. 3 potential actions:
i) Sell in May and Go Away. Buy back after the debt ceiling is lifted.
ii) Bargain hunt if S&P goes below 4,000
iii) be Warren Buffet and sit tight
Unrealised losses from (f) is really making investors sad. Alibaba, JD and Tencent have been getting cheaper since end of Jan (last rally) and many clients are stuck, running out of bullets to average down. Tencent has been paying special div through JD and Meituan shares to keep shareholders happy. Alibaba spin-off is likely to pay shares to shareholders as well. JD has not got much to pay its shareholders and it is down 42% year to date. Tencent is down 1.7% and Alibaba is down 11% year to date.
What to do? Well, the good news is that Alibaba, Tencent and JD still have a good business and they are profitable. So sit tight is an option.
China EV sector is a “polarised sector”. BYD +16.4% year to date, LI Auto +34.2%, Nio -20%, XPeng -19.5%. We would switch out of Nio and XPeng and buy BYD and LI. EV is a long term trend but not all players can survive. Aston Martin makes really nice cars but you may not want to be their shareholders
