A strong Hong Kong dollar is not necessarily a strong stock
Lets start with the reasons for the strength of the Hong Kong dollar. In the past two years, the interest rate of Hong Kong dollar has been significantly lower than that of US dollar, and traders use Hong Kong dollar to finance and buy US dollar denominated assets to carry interest. However, such carry trades are forced to close when spreads narrow or assets are sold off. In the context of the Feds sharp interest rate cut and asset sell-off in March, traders are leveling their previous carry positions. In addition, there have been many recent transactions involving borrowing low yielding US dollars and investing in high yielding Hong Kong dollars. At present, the three-month interest rates of the two currencies are about 80 basis points apart. As long as US interest rates remain close to zero and Hong Kongs savings rate does not fall significantly, we may see this trend continue. This has driven the Hong Kong dollar to appreciate against the US dollar.
Since 1983, the Hong Kong dollar has been pegged to the U.S. dollar in order to make local business and trade activities more predictable. The exchange rate of the Hong Kong dollar is guaranteed to remain between 1 US dollar and 7.75-7.85 Hong Kong dollars. With a sound financial system, the Hong Kong dollar has remained strong recently, while many currencies in the Asia Pacific region have fluctuated dramatically in the past few months.
Coincidentally, during the same period of Hong Kong dollars strength, Hong Kong stocks continued to usher in the inflow of funds from the South and rebounded at a low level. From the beginning of the year to the end of April, the total amount of capital in the south is 238 billion yuan, while that in the north is 35.3 billion yuan, which is also related to the mentality of a / h valuation premium reaching a historical high and investors layout valuation depression. However, is it true that Hong Kong dollar is stronger than Hong Kong stock?
In this regard, Zhao Wenli said that this conclusion cannot be reached simply. If the Hong Kong dollars strength is mainly affected by carry trade, it is likely to stay in the Hong Kong banking system rather than necessarily enter the stock market. For example, in September 2015, the Hong Kong dollar repeatedly touched the strong sides exchange guarantee, but during that period, Hong Kong stocks were generally in a downward trend; after the exchange rate reform on August 11, 2015, the expectation of RMB devaluation strengthened, resulting in a sudden increase in the demand for Hong Kong dollars and dollars, but the devaluation of RMB put pressure on the profitability of Chinese enterprises, while the downward pressure on Hong Kong stocks increased.
In fact, the bottom recovery of Hong Kong stocks in recent two months is mainly due to the large amount of southbound funds and the short covering of global after-sales. At that time, the undervalued value of Hong Kong stock relative to A-share was the main reason, that is, the A / H share premium was the main reason for the large amount of capital in the south. The Hang Seng A / h premium index soared from nearly 110 at the beginning of the year to a peak of 135 in March and has remained around 130 ever since.
Farewell to the panic selling in March, major global stock markets recovered nearly 60% of the decline in April, but in May, compared with the recent optimistic judgment that Hong Kong dollar is stronger than Hong Kong stock, the market volatility is more likely to increase.
Zhao Wenli told reporters that the strategy of selling in May needs to be examined from two perspectives, one is to observe the historical performance from November to April and may to October, the other is only to observe may. Over the past 10 years, the may sell strategy has been largely profitable. Since 2010, selling in May and buying back in November can avoid a sharp decline in the past five years. In May alone, the Hang Seng Index has fallen for eight of the last 10 years on record. Recent trends may indicate that the may sell strategy is robust.
This year, especially in the context of large market rebound and high uncertainty, the strategy of may sell may be effective again. Even if economies may begin to loosen restrictions on social distance, the consequences of the epidemic are far from clear. From May to July, the market may face more challenges. According to Zhao Wenli, most Hong Kong stock companies will release mid-term results from July, which will better quantify the impact of the epidemic and may trigger another wave of earnings forecast reduction. He suggested increasing holdings in sectors that could benefit from mainland demand, which could benefit from a relatively early restart of the Chinese economy. Source: editor in charge of the first financial daily: Guo Chenqi, nbj9931
This year, especially in the context of large market rebound and high uncertainty, the strategy of may sell may be effective again. Even if economies may begin to loosen restrictions on social distance, the consequences of the epidemic are far from clear.