The logo of the Industrial and Commercial Bank of China (ICBC) is seen through a glass at the company's headquarters in Hong Kong on August 24, 2011. (Laurent Fievet / AFP)
ICBC International predicts the H-share benchmark will rise 15 to 20 percent next year as good fundamentals will extend into the year ahead but warns that increased interest rates could bring liquidity pressure.
The investment bank sees more upside for the Hong Kong stock market next year, driven by a strong global recovery and solid growth of the Chinese mainland economy.
Profit growth for listed companies remains a key factor for both A-share and H-share markets, the bank said.
Mainland non-financial companies posted a profit growth of about 30 percent this year, beating market expectation.
Strong performance of mainland companies listed in Hong Kong, such as technology giant Tencent and insurance company Ping An, keep drawing southbound capital flow from mainland investors.
Looking ahead, the H-share market may gain additional support from the possible cooling of the mainland’s real-estate market and an increase in government investment.
Macroeconomic data shows that in October, fixed-asset investment - covering physical assets such as machinery, land and buildings - declined, especially private investment.
The lukewarm momentum in private investment is partly brought by mainland companies’ high corporate debt. Yet the bank is not pessimistic about economic growth, saying its research showed that historically the first year following the Communist Party of China’s five-yearly congresses features a significant rise in fixed-asset investment. Such fiscal stimulus keeps the profit growth of listed companies at a relatively sound level.
ICBC warned higher interest rates could put liquidity under pressure.
As the much-anticipated United States Federal Reserve interest-rate rise likely to happen later this month looms and year-end demand takes effect, the US dollar/Hong Kong dollar exchange rate is once again approaching the weak limit of the linked exchange-rate band.
Flags of the Hong Kong Stock Exchange (C) and Hong Kong (R) are seen at Exchange Square after the Hang Seng Index closed up by 0.3 per cent, at 28,458.04, its highest level in almost ten years, in Hong Kong on Oct 6, 2017. (ANTHONY WALLACE / AFP)
Under the currency peg, the Hong Kong dollar trades at between 7.75 and 7.85 per US unit and was at 7.815 on Wednesday, Bloomberg figures show.
To stabilize the depreciating Hong Kong dollar, The Hong Kong Monetary Authority, the city’s de facto central bank, issued Exchange Fund bills, which in turn pushed up the Hong Kong Interbank Offered Rate.
HIBOR rose to more than 1 percent for the first time since 2008 last week. One-month HIBOR reached 1.003 percent, while the three-month rate hit 1.189 percent last Thursday.
The rise of Hong Kong dollar interest rates will lead to a relative tightening of liquidity in the stock market, ICBC notes.
The blue-chip Hang Seng Index has tumbled from a sizzling performance last month, when it closed above the 30,000-point level on Nov 22, falling back to finish at 28,224.8 points on Wednesday, down 2.14 percent on the day.
Yet ICBC believes pressure will be limited since its research shows the H-share market is more sensitive to the 12-month HIBOR rather than shorter-term rates. The increase in southbound capital from mainland investors can also partially make up for the shortage of overseas capital.
The investment bank is long on the A-share consumer discretionary sector, Hong Kong’s healthcare sector and financial sectors in both markets, based on their performance and relatively low valuations.
The telecoms service sector has the highest valuation in the A-share market. The price-earnings ratio of China Unicom alone, which was up to 152.07 on Wednesday according to Bloomberg, boosts valuations across the board. In the H-share market, the highest valued sector is consumer staples. The financial sector has the lowest valuation in both markets, figures compiled by Wind show.
ICBC has upgraded its target for mainland GDP growth to 6.9 percent both for this year and next year. The bank sees global growth at between 3.6 percent and 3.7 percent. The mainland will remain the growth engine of world economy, contributing more than one third of global economic expansion, the bank said.