Top Down Strategy and Large Cap Stock Picks - the DBS Vickers ...

Country Assessment
Regional Equity Strategy Q4 2007
Review of 3Q: Tragedy for bulls and bears
The strong momentum for HSI and HSCEI came to a halt in 3Q07 with the unveiled
problems in US sub-prime mortgage loans, and reduction of carry-trade activities. HSI fell
4,171 points from a peak of 23,557 points in July to a low of 19,386 points in mid-August.
Fortunately, there have been no signs of significant deterioration (caused by the sub-prime
mess) in earnings for many listed stocks in the Hong Kong market.
China’s announced plans to allow individuals to invest directly in Hong Kong stocks (without
upper limit on investment amount) rekindled investment confidence in the stock market in
August and drove the HSI from the low to 24,599 in mid-Sep, up 5,213 points. Though
investments from individuals need to be channelled from Bank of China’s branches in
Tianjin, we believe more channels will be opened in other cities over the next few months.
We estimate that in the next two years, fund flows from the Mainland to Hong Kong
via individual investment, QDII and other financial intermediaries may exceed
US$150bn, providing voluminous funds for Hong Kong’s capital market. This flow of fund
may eventually find ways to seep into other capital markets such as Singapore and the US.
HSI
27,000
HSI
25,000
23,000
21,000
19,000
17,000
100-day MA
15,000
Sep-06 Dec-06 Mar-07 Jun-07 Sep-07
HSCEI
15,500
14,500
13,500
12,500
11,500
10,500
9,500
8,500
7,500
100-day MA
HSCEI
6,500
5,500
Sep-06 Dec-06 Mar-07 Jun-07 Sep-07
Source: Bloomberg
Inflation – winners of this long-term phenomenon
China’s inflation rate surged rapidly in recent months, reaching 6.5% in August, the highest
in 11 years. The consumer price index (CPI) even exceeded the rise in producer price
index (PPI) from 2Q07, which may mean manufacturers of consumer products may
start to regain pricing power to expand gross margins.
Despite the Government’s attribution of the high inflation rates to the skyrocketing food
prices, which were up by 18.2% y-o-y on average in August, we believe the high inflation
may last longer than expected.
Amongst the different consumer product prices and services, recreation & education,
clothing and transportation and telecom products recorded y-o-y declines of less than 1.5%
in August, while prices for liquors, residence, household facilities and medicine and services
were on the rising trend (up 1.7% to 4.3% y-o-y, and higher than the decline in other
industries). We foresee the fast rising capital value of properties may later drive up rental
value and inflation.
53