Three major factors could swing the market in the next few weeks, namely COVID-19, U.S. presidential election, and China’s 5th Plenary Session. The first two bring uncertainties, and as such we would avoid sectors which are highly vulnerable to these risks. The remaining major factor is China’s 5th plenary session, which we believe has much higher visibility and would be catalysts for certain policy-supportive sectors, such as consumer and clean energy.
- COVID-19 - Second wave in Europe. There has been a spike in new cases in Europe since late-Aug, with daily cases in the U.K. reached record high. Financial markets have not been reacting too negatively, and stocks may even rebound before daily new cases peak as stocks typically run ahead of fundamentals. That said, as the north hemisphere moves into winter, there are concerns over further resurgence in COVID-19 cases particularly in Europe and North America. Trends of new cases and news of vaccine development should be closely monitored.
- U.S. Presidential Election - What if a repeat of the recount in 2000? With just four weeks to go, investors will be keeping an eye on the U.S. election news. While Biden has been leading in polls, the election could be a close contest and the result may be decided by a few “swing states”. The worst outcome for the market may be a repeat of the vote recount in 2000. During that five-week stand-off, S&P 500 plummeted by almost 10%.
- China’s 5th Plenary Session - Pre-meeting rally. The 5th plenary session (五中全会) of the CPC will be held on 26-29 Oct. Key agenda includes setting the 14th Five-Year Plan and vision for 2035. Historical data suggest Chinese stocks tend to rise ahead of plenary sessions, and have mixed performance after the sessions.
- Technical Analysis - HSI oversold, what’s next? The HSI fell to an oversold level on 24 Sep. We reviewed every occasion of the HSI’s RSI falling to below 30 in the past decade. In short, after the HSI becomes oversold, the more likely outcome is that a short-term bottom is not far away, with only a moderate drawdown, but a strong rebound over the next month is not very likely either.
- Strategy: Buy policy beneficiaries and internet giants. China’s 5th plenary session could be catalysts for certain policy-supportive sectors such as consumer and clean energy. Besides, we remain bullish on new-economy stocks over medium-to-long term for their strong growth potential. Among growth stocks, Chinese internet giants stand out with high earnings visibility.
