On financial trend in fourth quarter
I n the face of three super ‘debt mountains’ and the potential chain of volcanic eruption, the market is anxiously looking forward to QE3 from the U.S. Federal Reserve to save the falling global stock markets. Looking ahead to the investment direction and strategy in the fourth quarter, we specially invited scholars and financial experts for giving some concussion-like analysis from which investors must be greatly benefited.
Stephen Wong, former investment bank senior executive and guest lecturer of Master programmes in Global Political Economics at the Chinese University of Hong Kong, said it took 20 years for Japan and 10 years for Hong Kong to get recovered from the economic bubble bursts. The U.S., after the property market bubble burst, is implausible to get a V-shape rally. Above all, the economic fundamentals of the U.S. have been weak, the financial crisis of 2008 was like an ‘economic heart attack’. Afterwards, it has been unable to raise the interest rate, and had to rely on QE, which is very much like a ‘balloon angioplasty’ to extend its lifespan in half-dead state. He added, the ‘economic vessels’ of Europe and the United States had vascular occlusion in recent years. The latter had the money to buy QE specific drug while the former was not that fortunate to be immune from the ‘heart attack’, resulting in chained banking crisis, which became the biggest market concern.
Olivia Tsui, Head of Warrants Marketing in Derivatives Department at Macquarie Capital Securities Limited, said the volatility index rose to 50 in August, posing certain impact on the implied volatility of OTC options. In this connection, there was more investment in index warrants than that in share warrants in August, suggesting that most investors took a conservative and prudent manner towards the market outlook. She pointed out that the derivatives are always short-term investment vehicles. The market has now close to 5,000 warrants, so investors need to know clearly the expiration date, price direction of the underlying asset, leverage ratio, as well as implied volatility changes. In fact, implied volatility is the forecast of market volatility. For two warrants with the same terms, the one with lower implied volatility has lower nominal value; conversely, the one with higher implied volatility has higher nominal value. Typically, warrants with lower nominal values may have more distant exercise prices or closer to the maturity date.
Matthew Kwok, Vice President (China Division) of Haitong International Securities Group Limited, said except the U.S., the variables affecting the major global market come from Europe. First of all, the local CDS, particular Greece’s, rose again, and the EU’s lending collateral is still unsettled; secondly, the European purchase index fell below 50, indicating contraction of commercial procurement activities and the economy began to lose momentum; thirdly, European banks had purchased a large number of bonds, the debt crisis made Europe situations complicated. Looking back to the local market, the Hang Seng Index has previously posted P/E of over 20 times, but, due to fund outflow, it has now plunged to 9 times, against 8 times during 2008 financial crisis. Kwok believes that the stocks are currently undervalued, investors are recommended to hold for a medium to long term rally rather than sell at this stage.
Kwok added that Hong Kong stocks are also influenced by the prospect of QE3 in the U.S. If it is launched, inflation will be driven up. The direct benefit is the stimulus to the consumer market, followed by the benefits of reduction in the U.S. minimum wage timely, which in turn will increase the local employment opportunities. As the stock-pinking strategy in the fourth quarter, he suggested investors paying attention to different industries with an aim of betting on rebound. Regarding mainland banks, the overall bad debt ratio is only 1%, but he worried that the ratio will go up and the P/E of 6-7 times just reflects such possibility. Statistics show that if mainland banks’ bad debt ratio soared 20%, the entire banking system needs to make provision for up to RMB400 billion.
Kwok also recommended CCB (00939) which he believes to have 10% rising potential with support standing near $5. As to the insurance sector, he recommended PICC P&C (02328) due to the rapid growth of the mainland automotive insurance business. The loss ratio has dropped to 95% and it does not rely much on investment income. Investment value would show for the share price below $12. In the telecommunication sector, the opportunity for booming reversal of the 3G business has emerged as the ARPU has risen all around. Kwok’s top pick is CHINA TELECOM (00728) as its low number of 2G customer ignites room for rising 3G customers in future. The share price below $4.8 would be undervalued.