BEIJING: Investors looking to navigate stronger growth, resurgent inflation and higher interest rates in the U.S. and China should look to Hong Kong-listed Chinese stocks and avoid Singapore stocks. The Federal Reserve’s decision to raise U.S. interest rates by 25 basis points, and reiterate its forecast for two more hikes this year, is a positive sign for the U.S. economy but is a threat to some Asian stocks. Hong Kong and Singapore stocks are at risk because both countries import U.S. monetary policy, meaning higher U.S. rates translate into higher borrowing costs for companies in the two Asian trading hubs. Both markets have a heavy weighting to property developers, so higher interest rates will raise the cost of funding new properties, while mortgage rates for potential buyers will also rise.
Chinese stocks listed in Hong Kong, known as H-shares, offer investors a smart way to gain exposure to a rebound in China’s economic growth. These stocks are also cushioned against rises in the U.S. dollar fuelled by the expectation of higher interest rates as the Hong Kong dollar is pegged to the greenback. The rebound in Chinese economic activity, supported by government stimulus, has made leading strategists more bullish. Goldman Sachs strategist Timothy Moe recently upgraded China to overweight. The broker lifted its forecast for nominal GDP growth in 2017 to 10.7% from 9.4%. It also lifted its forecast for real, or inflation adjusted, GDP growth to 6.6% from 6.5%. Moe expects Chinese earnings to rise 13% this year as stronger nominal GDP growth boosts revenues. He also notes that stock valuations and foreign fund flows are correlated with nominal GDP growth. Additionally, mutual funds are heavily underweight China, which leaves room for inflows. Moe has a target level of 73 for the MSCI China Index, which implies 13% upside.
While the Hang Seng China Enterprises Index, a gauge of H-Shares, has risen 27% over the past year, it’s still below its average of recent years. H-shares are among the cheapest stocks in Asia. Goldman Sachs’ Moe expects $54 billion dollars of net inflows into Hong Kong stocks from mainland China. Cyclical and value stocks should outperform defensives given China’s stronger growth. Moe is particularly upbeat about banks, having upgraded the sector to overweight. He argues stronger growth should stimulate demand for loans, alleviate pressure from non-performing loans and improve net interest margins. Barron’s Asia took a favorable view on Chinese banks in early March and highlighted laggard China Construction Bank (939.HK) as a stock pick.
