The Hang Seng Index is approaching 30,000 with record-high market turnover. While valuation of the broad market is no longer cheap, we expect momentum to remain strong in coming weeks. In a more optimistic case, the HSI could rise to 32,100, i.e. 7% upside from here. We prefer certain cyclical stocks which have been laggards.
- Southbound trading increasingly influential. Southbound buying is a main driving force behind HK market’s rally YTD. It now accounts for over 30% of daily total turnover in HK market. But note that sudden spikes in Southbound turnover often coincided with or preceded turning points in the HSI.
- HSI valuation at decade high. The HSI is trading at 13.5x 2021E P/E, right at decade-high valuation. No longer cheap even having considered the HSI has now included more growth stocks and deserves slightly higher multiples.
- Momentum could remain strong in coming weeks. The key reason behind aggressive Southbound buying is that HK stocks/H-shares were relatively cheap and lagged behind in 2020. After some catch-up by H-shares, A-H premium has now shrunk to 33%, which is still high versus historical average. Expect Southbound buying to remain strong in the short term.
- HSI is extremely overbought, but may rise further. The HSI has rarely been this overbought, with 14-day RSI at 86.3. But on previous similar occasion, the HSI on average rose 7% further and peaked 13 trading days later.
- Cyclicals outperform during final rallies. During late cycle rallies in Apr 2015 and Jan 2018, cyclical sectors such as financials, energy and property outperformed.
- Strategy – Preferred lagging sectors/stocks: 1) Brokerage sector which benefits from buoyant stock market, with sector P/B still below historical average; 2) Insurance sector which also benefits from strong stock market; 3) China property sector, which lagged behind due to overly concerned about loan cap & policy tightening; 4) Laggards within certain sectors, as there could be some intra-sector rotation into laggards.
