Liquor makers reaped spectacular gains. 5G-related electronics outperformed. A craze over rare earth and industrial hemp swept across the market and passed.
For investors in China and Hong Kong’s stock markets, 2019 will go down as a year with unforgettable upheavals and surprises.
The US-China trade war raged on for nearly two years before the world’s two economies reached an initial ceasefire. In Hong Kong, the financial hub of Asia, massive protests against the government erupted out of nowhere, plunging the city into a recession and tearing up the social fabric. The Chinese economy continued its search for a bottom.
All those dramatic twists and turns in news headlines have led to rapidly changing investor mood and greater difficulty in navigating the market.
“In 2019, emotions seemed to matter more than fundamentals … markets jumped based upon whether [Chinese Vice-Premier] Liu He smiled when exiting a trade meeting,” said Brock Silvers, managing director at Adamas Asset Management.
The headline for what 2019 has been like for traders should be, “Expect the unexpected,” said Kenny Wen, wealth management strategist at Everbright Sun Hung Kai.
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The markets entered 2019 with a strong rebound from brutal losses a year before. The Shanghai Composite Index soared by 24 per cent and the Hang Seng Index climbed by 12 per cent in the first quarter. But the spectacular gains dissipated quickly in the rest of the year – as we warned in this article – with the China markets moving sideways while the Hong Kong suffered two consecutive quarters of sell-offs before a small year-end rebound.
Some sectors that gained early in the year managed to extend their rally into the last part of 2019.
Electronics makers related to the fifth-generation mobile networks (5G) were among the top gainers this year, after they outperformed in as early as the first quarter. Radio frequency device producers soared by 102 per cent while optical module makers gained 104 per cent, measured by gauges compiled by data provider Wind. China’s push for a telecommunications upgrade to lead the world in 5G development meant fat orders for network builders, component suppliers and smartphone markers.
Meanwhile, Chinese liquor makers, one of foreign investors’ favourite sectors, regained momentum to lead the market after a short setback in July, when a change in sales distribution channels of leading player Kweichow Moutai sparked a backlash among shareholders. The company has since managed to convince the market that profits will be protected and returned a stunning 97 per cent in stock price so far this year.
Wireless earbuds makers and component suppliers may be latecomers to the party, but have nonetheless been the best-performing sub-sector, as investors piled in on a nationwide fad over Apple’s AirPods products. A Wind gauge tracking 17 related stocks advanced 216 per cent, with AirPods’ main assembler Luxshare Precision Industry surging 233 per cent.
Then there are more short-lived passions.
Industrial hemp-related stocks have fallen back somewhat amid repeated regulators’ warnings after jaw-dropping gains in the first three months, while rare earth magnetic material makers also pared some of their profits as the US-China trade war draws to a pause.
In Hong Kong, consumer product retailers – most of them operating in China – were the brightest spot in the market, despite an epic fall in previously high-flying beverage maker Vitasoy. A Wind gauge tracking Hong Kong-listed retailers surged 61 per cent so far this year. Some of the most noticeable stocks include sportswear makers Li Ning and Anta Sports, which soared by 191 per cent and 99 per cent respectively on successful transformation into higher-end segments. Beer stocks also outperformed – Tsingtao Brewery has gained 62 per cent so far – on rising domestic demand for alcohol.
Pharmaceuticals trailed retailers with a 37 per cent jump. The sector, protected from trade war impact, benefited from quicker drug approvals by Chinese authorities and robust domestic demand. CSPC Pharmaceutical Group, the largest drug maker by market value, gained 64 per cent this year.
Looking forward into 2020, heightened market risks are likely here to stay, Silvers said.
“China slowdown has been longer and deeper than anticipated or admitted. Hong Kong’s social unrest, regardless of its complicated origins, nonetheless revealed itself as an ongoing long-term threat to its economy and society,” he said.
“And the trade war, despite the possibility of a ‘phase one’ agreement, seems likely to reappear,” Silvers said.
But opportunities also abound, as China’s policymakers are likely to step up fiscal policy support to shore up growth while companies continue shifting their focus to the domestic market.
As trade uncertainties eased, companies are likely to resume increasing capital expenditure in 2020 after putting off expansion this year, which will lead to higher industrial demand and better earnings, according to Kai Kong Chay, senior portfolio manager for Greater China equities at Manulife Investment Management.
Manulife sees potential in Chinese manufacturers of car parts, as they expect auto sales to rebound in early next year after two years of decline. A wave of purchases stimulated by tax cuts four years ago is also likely to prompt a surge in replacement demand next year, Chay said in a recent media conference.
Other research and development related sectors including biotech, data centre producers and manufacturers on the 5G supply chain, are also likely to do well, as China is pushing for technological self-reliance, he said.
“The equities market looks better next year than this year,” he said. “We are more positive on the Greater China equities in 2020.”
Additional reporting by Deb Price
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