After moving sideways for two months, the HSI is more likely to go up in Sep, backed by a policy adjustment by the Fed, weak USD and strong CNY. The Fed’s shift to average inflation target will probably make the yield curve steeper and the USD weaker. Financial and property stocks could benefit more from these factors.
- Earnings season review: Financials overshadows internet. Interim earnings have been disappointing in HK market, and the EPS estimates of the HSI have been revised down by 2.5%/1.4% for 2020/2021. Financial and property sectors have seen earnings cut post-result, while internet stocks reported upbeat results.
- Fed’s policy shift: average inflation target. The FOMC announced on 27 Aug to update its policy goals. The most notable change is it would seek to achieve inflation that averages 2% over time. We believe that means inflation can stay moderately above 2% for several years before the Fed considers raising rates.
- Market impact: Steeper yield curve, higher stock prices. We expect the Fed's policy shift would make the U.S. long-term Treasury yield higher, yield curve steeper and stock prices higher, especially financial stocks which would enjoy a steeper yield curve.
- Weak USD & Strong CNY. The Fed’s latest signal to keep interest rates on hold for years to come may extend the slide in USD. A weak USD usually bodes well for emerging market equities. The CNY strengthens against the USD, benefiting asset-heavy sectors like real estate and financials.
- Technical Analysis: HSI next target 26,782. YTD, the HSI has formed a triangle, and is on the verge of break out. Fundamental factors should make the break out more likely to be upwards than downwards. Once the HSI breaks 250-day MA at ~25,800, short-term target should be 26,782, the peak in early- Jul. Gold remains in uptrend after consolidation. Expect more upside in medium- to long-term as the Fed commits to low interest rates.
- Strategy: Buy financials, property and internet giants. The HSI is more likely to go up in Sep to break the narrow range. Financial and property stocks could benefit more from Fed policy shift, weak USD and strong CNY. Internet giants will probably play a part when the HSI rises further. Besides, we continue to like construction machinery stocks on increasing infrastructure spending by China.
