E Fund HK: Market Overview (November 2016)

summary

Recent political events have shrouded Europe’s outlook in uncertainty, with issues ranging from immigration integration to political unrest within the region. The importance of orchestrating a successful Brexit is of utmost importance to the UK and the EU in 2017 

The US economy continued to improve after a historically strong third quarter, with markets projecting better local consumption and spending through Trump’s economic policies; the Dollar gained significantly and will likely continue its current bullish run

Oil prices ended the month at 52 USD per barrel with OPEC successfully negotiating a cut in production; oil prices will likely remain stable for the rest of 2016 and the commodity is projected to have a bullish run in 2017 from demand expectations

U.S. equity markets hit all-time peaks in all major indices this month as a result of strong expectations that Donald Trump’s policies will boost local spending and infrastructure; however, a lack of definitive direction and elevated valuations remain as significant risks to the markets  

The Shanghai Stock Exchange Composite Index gained 4.82% on the month, continuing a bullish run marked by a recovering economy in China and improved corporate earnings throughout the third quarter

The Hang Seng Index had a mixed November losing 0.6% and showed increased volatility led by macro events; the market expects another turbulent month from external influences but will likely see reflation in view of strong fundamentals

Markets have been politically dominated year-to-date, beginning with Brexit, the surprising victory for Donald Trump in the presidential election, and now Matteo Renzi’s resignation following Italy’s constitutional referendum resulting in a firm “No” from voters. France’s political climate also showed surprising results following Francois Fillon’s selection as the Republican candidate for 2017’s presidential election. Europe is now facing an increasingly difficult environment with economic stagnation and political risks arising across the region; the expectations of orchestrating a successful Brexit is also looming on the UK’s and EU’s agenda in the coming year. Investors should be understandably bearish on Europe’s outlook as there are strong concerns for growth and earnings recovery in the region. On the contrary, the US has markets predicting a strong resurgence on the back of potential tax cuts and increased spending on infrastructure, driving equity and commodities market to a very strong month.

The US Dollar continued its strong bullish run, gaining 8.4% on the Yen and 3.3% on the Euro. This strong run can be attributed to increasing consensus within the market on further rate hikes in 2017, in combination with a weakening Eurozone and a lack of economic recovery in Japan. If rates were to rise at a faster pace than market expectations, the Dollar will likely continue its current bull run. Growing interest rate spreads between the US and other economies is a key driver for the Dollar and will likely put further upward pressure on the currency going forward. 

The US’s focus post-Trump will likely be to maintain its current pace towards its 2% inflation target set in 2014. Markets are currently projecting a 100% chance of a Fed rate hike in December’s FOMC, on the back of strong employment statistics and the overall strong third quarter performance within the US. We believe that, whilst volatility in macro environments might be hugely impactful to the Dollar, the currency is likely to see a period of extended growth due to the prospect of multiple rate hikes in 2017. The Dollar’s strength will be problematic to exporters and emerging markets, whilst being a positive to overseas companies with significant exposure to the US.

Oil prices saw a strong November which continued October’s strong rally, returning their best single month performance in 2016. Crude Oil prices ended at 52 USD per barrel, driven by OPEC’s agreement to cut production by 1.2 million barrels a day. On the whole, prices will likely remain stable until year-end and are projected for a bullish run in 2017 due to demand recovery in several regions of the world. 

U.S. equity markets hit all-time peaks this month, driven by Trump’s growth oriented policies. Donald Trump’s fiscal oriented stances have markets predicting an upbeat economic outlook for the US, driving small-cap shares to all-time highs. Overall, the S&P traded up 3.7% in November with the Dow gaining an impressive 5.4% due to resurgence in industrial related sectors. Given the current projections about the US shifting from a monetary policy to a fiscal policy, a large divergence is being seen between equities and fixed income markets. Concerns about inflation and tighter monetary policy saw large capital outflows from bond markets into equities market in November, with the US 10 year Treasury posting the year’s worst single month performance. With the US economy expected to grow, emerging markets are expected to see major concerns going forward due to a stronger Dollar and political risk related to Trump’s anti-trade policies.

A definite shift toward fiscal policy should continue the market’s strong performance on expected economic expansion; however, investors should take caution on the lack of definitive confirmation on Trump’s policies and current valuations being significantly elevated for many small cap stocks. 

 
The Shanghai Stock Exchange Composite Index gained 4.82% on the month, arising from a strong performance in China’s economy and Chinese stock investors taking on more leverage as they gain confidence in a bull market rally. China’s manufacturing PMI rose to 51.7%, beating estimates of 51% and reached a two year high, whilst November’s non-manufacturing PMI rose to 54.7%, a consecutive three month increase and also a two year high. China’s resilient economy despite bearish bets to start the year have surprised markets and have instilled a new found confidence within stock market investors. Strategists are now predicting the Shanghai Composite Index will rise to 3,500 by the end of the year as a result of positive signals across the board. Improved corporate earnings led by producer prices shifting to positive will be beneficial into at least the first quarter of next year. 

The ChiNext composite index continued trading within last month’s range of volatility and increased 2.29% in November, underperforming the Shanghai Composite Index slightly as large cap stocks rebounded. Small cap companies in China have seen a repetitive pattern this year with over projection and underperforming leading; however, there remains a significant amount of money circulating in the market leading to high daily volatility but overall stable performances.

 
The Hang Seng Index had a relatively weak November following a historic third quarter. The market lost 0.6% in November, finishing at 22,789, with large variances in market turnover. November was a highly volatile month for the Index, with markets initially reacting to a Trump presidency and losing over 4% in a single day. This was swiftly followed by markets projecting a 100% chance for a December rate hike leading to mixed performances between the real estate and banking sectors. In summary, the performance of the HSI mirrored macro moves, with commodities and infrastructure related sectors seeing a boost from Trump’s expected policies and technology sectors experiencing a downward revaluation due to earnings outlook and political risk. OPEC’s successful negotiation brought significant gains to energy stocks, whilst the launch of the Shenzhen Stock Exchange provided mixed performances for securities related companies. 

The market experienced a historic third quarter leading to a slight correction in October and November with major political events being a risk to global markets. However, local economic data was above expectations with retail sales dropping significant less than market estimates, signalling a recovering retail economy. We believe that, whilst the macro environment poses a significant threat to the Hang Seng Index’s growth potential, current levels are highly sustainable from strong earnings expectations and a stable local economy. We project December to be another volatile month due to multiple uncertainties within the macro environment possibly revaluating the Index to levels below 22,000; however, a bullish run for the Shanghai Composite Index and U.S equities have historically been beneficial to the Hang Sang Index. We expect mid- to long-term recovery in the market due to strong underlying fundamentals and a recovery in world economies. 

Trading Department

E Fund Management (HK)

November 2016

About “E Fund HK”

E Fund Management (HK) Co., Ltd (“E Fund HK”) was officially established in 2008 and is licensed by the Securities and Futures Commission of Hong Kong to conduct Type 1 (Dealing in Securities), Type 4 (Advising on Securities) and Type 9 (Asset Management) regulated activities. As a premier global business platform for E Fund Management Co., Limited (“E Fund”), E Fund HK has a subsidiary in New York, and listed several RQFII ETFs and RQFII/QFII public funds, at six stock exchanges across the US, Europe and the Asia-Pacific. Its award-winning products have been recognized by leading institutions such as Morningstar, Lipper, AsianInvestor and Benchmark for their strong performances relative to peers.

E Fund, the parent company of E Fund HK, was founded in 2001 and headquartered in Guangzhou. It has branch offices in Beijing, Guangzhou, Shanghai, and subsidiaries including E Fund HK and E Fund Asset Management Co., Ltd. E Fund has grown tremendously to become one of the largest fund management corporations in China with assets under management RMB 948 billion* (including E Fund HK and China subsidiaries). It is licensed to cover a full spectrum of asset management services in China including, public funds, national social security fund, corporate annuities, discretionary accounts, QDII, QFII and RQFII. E Fund passed the independent verification of the Global Investment Performance Standards (GIPS) in August 2014, signifying an important step forward to become more internationalized with unified performance reporting.

Capitalizing the investment and research ability of E Fund, E Fund HK maintains three investment research teams, each specializing in RQFII/QFII, overseas and alternative investment. Integrated with E Fund’s global expansion strategies, E Fund HK is committed to providing quality asset management services for onshore and offshore investors in Greater China and US ADR markets. Via the construction of a global-facing asset allocation platform, E Fund HK serves as a window to investors in China for asset allocation exposures all over the world. 

* as of 30 September, 2016

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