Acute volatility in the stock and currency markets in China, not to mention slumping crude oil prices, since the start of the year is not necessarily the precursor of another imminent
While more downside to share prices as a result of the volatility is possible, especially since further devaluation of the yuan is widely expected, it is time for investors to seek opportunities to buy rather than sell Hong Kong-traded stocks, they argued.
“China is not on the verge of collapsing, the sell-off will soon appear as what it really is, a scare,” said AXA Investment Managers’ analysts in a note. “Growth is slowing, profits are squeezed and deleveraging is painful, yet this is neither new or unmanageable.”
Banny Lam, co-head of research at ABC International Securities, said recent economic indicators, while not bullish, do not point to a global crisis.
“While some investors may choose to sell on the expectation of more short term volatility, Hong Kong-listed shares’ valuations are already very low ... investors should pick up shares of industry leaders and high dividend-paying stocks for a medium term investment horizon,” he said.
The nod to accumulate Hong Kong stocks runs counter to the views expressed recently by a number of renowned economists at leading investment banks, who urged investors to lower their exposure to equities, amid what they believe is a darkening period ahead for global asset prices.
Among them, Andrew Roberts, RBS’ research chief for European economics, warned of a “cataclysmic year” taking shape, as China could be the black swan to trigger the next global financial crisis. Roberts said in a note Tuesday investors should “sell everything except high quality bonds” as stock markets could plunge up to 20 per cent and oil could halve to around US$16 a barrel this year.
He noted that recent turbulence in the global financial markets is akin to that seen during the months before the collapse of Lehman Brothers, which led to a full-blown global crisis in 2008, adding thatChina needs a “dramatically lower” currency to stem capital flight.
His bearish view was echoed by Societe Generale’s strategist Albert Edwards, who warned the world is heading to a financial crisis as bad as 2008 which could see the collapse of the eurozone monetary union.
Global asset markets have, for the most part, been dragged lower in unison, reflecting the interconnected nature of world markets.
Since the start of the year equities in the US and Europe have dropped around 5 per cent, while mainland China share have slumped a sharper 15 per cent. On the energy markets, crude oil has dived 16 per cent, fronting what’s been a devastating rout in industrial commodity prices.
A battle between China’s central bank and currency speculators drove the overnight borrowing cost of offshore yuan in Hong Kong to a record high on Tuesday, harkening back to almost two decades ago in the Asian financial crisis when the Hong Kong Monetary Authority drove the overnight HK dollar borrowing rate to 300 per cent to fend off speculators betting on an de-pegging from the greenback.
Wilson Chan, associate director of City University of Hong Kong’s master of business administration programme, said the battle between China’s central bank and currency speculators has only just begun and Beijing may have to eventually bow to market forces and let the yuan fall, citing the results of past attacks on the British pound in 1992 and the Thai baht in 1997.
But other analysts said the extreme borrowing costs are only hurting yuan borrowers in the relatively tiny offshore market. China’s central bank still has control over the yuan in the onshore market despite a policy to let market forces play a greater role in determining the yuan’s value.
“The situation is not as bad as it seems, volatility in the offshore yuan market will hardly have much of an impact on the onshore market and the mainland economy,” said Patrick Yiu Ho-yin, managing director at CASH Asset Management.
Meanwhile, Bank of America Merill Lynch’s commodity strategists expect oil prices to bottom out in the first-half, since many oil producers would be unable to cover operating cash costs at below US$30 a barrel.