As China gears up for a potential fiscal stimulus, the ripple effects are already being felt in the Hong Kong market. Stocks surged during China’s National Day holidays, driven by optimism surrounding government interventions to boost the economy.
With key sectors like e-commerce and technology poised for recovery and the introduction of Singapore Depository Receipts (SDRs) making Hong Kong stocks more accessible, investors now have a unique opportunity to capitalise on this momentum. Let us find out how to leverage these developments for your investment portfolio.
Hang Seng Index: Riding the wave of China’s stimulus optimism
Recent positive sentiment around Chinese assets is largely driven by expectations of a major fiscal stimulus package. This optimism has spilled over into the Hong Kong market, with stocks surging upwards for days during China’s Golden Week holiday.
The market saw a rapid rise in the month of September, followed by a sharp pullback. However, the overall uptrend remains evident. Investors should keep an eye on the key level of 19,700 to gauge whether market participants are convinced of the sustained upward momentum.
The upcoming stimulus may or may not meet expectations. What we can be certain of is the Chinese government’s strong determination to boost its economy.
So, how can we take advantage of this news, along with the current market signals?
Here are three key points to consider if you want to tap into this potential upside:
Which financial instrument to utilise — Choose the right vehicles, such as SDRs, to gain exposure to the Hong Kong market
Key Hong Kong businesses to monitor — Identify companies that are likely to benefit from the stimulus and economic recovery
Set a budget — Plan your investment carefully to manage risk before you seize an opportunity
See also: Is the rise of electronic FX options trading inevitable?
Singapore Depository Receipts: The financial instrument for Singaporeans
China’s recent economic challenges have sparked a wave of anticipation in the investment world, particularly in Hong Kong. As the world’s second-largest economy grapples with sluggish growth and a property sector downturn, investors are keeping a close eye on potential stimulus measures.
The Hong Kong Stock Exchange, often seen as a key indicator of the Hong Kong market sentiment, has seen fluctuations as speculators bet on Beijing’s next moves to boost China’s economic growth.
The Hang Seng Index, Hong Kong’s benchmark stock index, has become a focal point for investors looking to capitalise on China’s fiscal stimulus efforts. Recent announcements from Chinese officials have hinted at possible interventions to support the property market and stimulate consumer spending.
This anticipation has created an opportunity for investors, particularly during the early October rally that coincided with China’s National Day holidays.
For Singaporeans, however, investing in Hong Kong stocks traditionally involves foreign exchange charges, custody fees and adherence to the rules of the Hong Kong Stock Exchange.
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To streamline the process, the Singapore Exchange S68 (SGX) introduced Singapore Depository Receipts (SDRs), allowing Singaporeans to invest in Hong Kong stocks directly with Singapore dollars.
SDRs represent a beneficial interest in an underlying security listed on an overseas exchange, offering several advantages to local investors: First, investors can take positions with a smaller lot size, for example, buying 10 shares instead of the usual 100 shares of a Hong Kong-listed stock. Next, there is no need to convert Singapore dollars (SGD) to Hong Kong dollars (HKD), making the process simpler and more cost-effective.
Looking deeper into Hong Kong
As investors explore opportunities in the Hong Kong market, two prominent companies consistently stand out: Alibaba and Tencent. Both are pivotal players in the tech industry, driving innovation and influencing market trends not only in China but also globally. We will delve into their recent performances and future growth potential to provide a clearer picture of their roles within the broader investment landscape. Let us start by focusing on Alibaba, followed by Tencent.
Alibaba: E-commerce giant’s path to recovery
Alibaba, once the undisputed leader of China’s e-commerce landscape, has faced significant challenges in recent years. However, recent market developments suggest a potential turnaround for this tech giant. Here is a breakdown of Alibaba’s core business segments:
E-commerce: Alibaba operates leading online retail platforms in China, including Taobao (C2C) and Tmall (B2C). Alibaba.com serves as a B2B platform connecting Chinese manufacturers with global buyers. Lazada serves as its primary e-commerce platform in Southeast Asia.
Cloud computing: Alibaba Cloud is one of the largest cloud service providers in Asia, offering services such as data storage, computing, and artificial intelligence (AI) technology.
Digital media & entertainment: Alibaba owns Youku Tudou, a leading video-streaming platform in China.
Logistics: It also operates Cainiao Network, which coordinates and optimises logistics for e-commerce orders.
Financial services: Alibaba holds a significant stake in Ant Group, which operates Alipay, one of China’s largest digital payment platforms, providing services like wealth management, insurance and micro-financing.
New retail: Blends online and offline retail through investments in grocery chains like Hema (Freshippo) and partnerships with traditional retailers.
Innovation and AI: Invests heavily in AI, machine learning, and other technology-driven research through Damo Academy. It focuses on developing smart city projects, autonomous vehicles, and other advanced technologies.
Alibaba’s future prospects will likely depend on three factors:
Cloud-computing growth: Alibaba Cloud, the company’s cloud computing arm, represents a significant growth opportunity as businesses in China and beyond continue to digitise their operations.
Chart 1: Alibaba: Tech analysis
Alibaba’s stock price has recently surpassed the significant HK$100 ($17.20) mark, approaching the 2023 high of HK$118.5. At present, the stock is hovering around a key support level at HK$99.
Investors should monitor whether this level holds, particularly in conjunction with any further stimulus announcements from China. Should the stimulus measures meet or exceed market expectations, we could see a continued upward trend in Alibaba’s stock price.
Tencent: The multifaceted tech conglomerate
Tencent, a diversified technology conglomerate, has emerged as a powerhouse in the Chinese tech sector, with interests spanning social media, gaming, fintech and cloud services. The company’s recent performance and strategic positioning make it a compelling subject for investors looking to gain exposure to China’s digital economy.
Tencent’s success is built on a diverse portfolio of businesses, each contributing to the company’s overall growth:
Gaming: As one of the world’s largest gaming companies, Tencent has seen a strong recovery in this segment. The company’s ability to develop and publish popular titles, both domestically and internationally, has been a key driver of revenue growth.
Social media and communication: WeChat, Tencent’s flagship messaging app, is a dominant platform in China, serving as a super-app for communication, payments and other services.
Fintech and business services: Tencent’s fintech arm, which includes services like WeChat Pay, has shown robust growth. The company’s cloud computing services have also gained traction as businesses in China accelerate their digital transformation efforts.
Digital content: Tencent Video and other content platforms have captured a significant share of China’s growing digital entertainment market.
Strategic investments: Tencent’s strategic investments in various tech companies globally have provided additional avenues for growth and diversification beyond its core operations.
Looking ahead, three key factors will shape Tencent’s future growth:
Gaming pipeline: The success of new game releases and the ability to navigate regulatory approvals for game publishing will be crucial for continued growth in this segment.
Expansion of the WeChat ecosystem: Further development of mini-programmes and enterprise services within WeChat could unlock new revenue streams.
Cloud and AI investments: Tencent’s growing focus on cloud infrastructure and AI technologies positions it to meet rising demand for these services, both in China and internationally.
Chart 2: Tencent: Tech analysis
Tencent, like many other Hong Kong stocks, saw an initial surge in response to the stimulus news. Investors are now keeping a close watch on key support and resistance levels around HK$430 and HK$400, which will be critical areas to monitor for potential entry points as market participants react to upcoming economic developments.
Conclusion
When investing in a market driven by stimulus news, it is vital to have a clear strategy and budget. Identify your entry and exit points based on key levels and stick to them. Focus on strong, fundamentally sound businesses, particularly market leaders better positioned to capitalise on growth opportunities.
Consider spreading your investments across multiple tranches to reduce market timing risks. Remember, no one can predict market movements with certainty, so use the right financial instruments to minimise costs, plan your trades carefully, and stay disciplined in your approach.
Chua Minghan, CFA, is deputy head of the HQ dealing team at Phillip Securities
