Brexit vote has triggered huge volatility in global financial markets, giving anxious moments to investors.
While trading will remain choppy in the near term, the chaos stemming from the UK referendum will however present an opportunity for investors to increase their exposure to Hong Kong and mainland China equities, EJInsight reported.
It is worth bearing in mind that over the last decade, the Hong Kong market posted rallies in July for nine years out of ten.
Some sectors in the Hong Kong market now look attractive in terms of valuations. As for the mainland, stocks there could also see some renewed interest amid favorable capital flows.
In the short term, various central banks around the world, especially the European Central Bank, might take steps to stabilize the markets.
However, the heightened political and economic uncertainty in Europe might prompt investors to withdraw money from the region in the next two to three years.
Scotland and Northern Ireland, where a majority of voters voted to remain in the EU, might launch referendums on breaking away from the United Kingdom.
The Brexit vote, meanwhile, could prompt other European nations to make their own moves, which will add to fears of the collapse of the European Union.
Currently, investors are expecting major central banks to pump money into their economies to stimulate growth.
China might further reduce the bank reserve requirement ratio to unlock more funds into the system. Meanwhile, the odds of a US rate hike in July have diminished.
More Gain Than Loss
As all these moves will be supportive factors for the equity markets, investors might reconsider China, which is still maintaining a growth rate of 6.7% despite a slowdown.
The possibility of an EU collapse could be an opportunity for China. Fights among EU members would tip the balance in favor of the US and Asia, and China has more to gain than lose.
However, Hong Kong, which is highly exposed to the global market, may continue to struggle with increasing market volatility.
Investors have to adapt to the fact that they should frequently switch bets in order to make money amid subdued global economic growth.
They should collect some risk-on stocks during each deep correction and take profit if the market rallies 1,000 or 2,000 points. After taking profit, investors should switch to risk-off plays like high-dividend stocks.
This strategy will continue to work in the third quarter of this year. Investors should frequently switch between risk-on and risk-off plays, and focus on companies that are exposed more to the US and China markets.
Investors can buy gold and some gold mining stocks, among other assets. Also, companies that could benefit from the upcoming Shenzhen-Hong Kong Stock Connect are also good bets.
Property stocks also are good bets as the US will put off interest-rate hikes and global central banks will pump more liquidity into the markets.
Chasing Yield
Britain’s vote to leave the European Union has pushed down already low global bond yields to even lower levels.
Given the high possibility that interest rates will stay low for another protracted period, investors are expected to keep chasing assets that are relatively stable and can offer some yield.
Real estate investment trusts are one type of assets that will benefit. Defensive utility plays will also be in demand.
Elsewhere, interest in investment property in the Asia-Pacific may pick up, property consultancy Colliers said.
Brexit will probably “increase the relative attraction of the 3-6% yields on core Asia-Pacific investment property,” it said.
With US interest rates likely to be on hold for some time, so will be Hong Kong’s given the currency peg.
Local property developers may take advantage of the chance to launch new projects.
Meanwhile, foreign developers from all over the world are also gearing up their marketing efforts to tap Hong Kong buyers for homes located anywhere from popular countries like Britain and Japan to more exotic places like Cambodia.
