Review and Outlook (August 8, 2022)

Fortnight in Review

On July 27, the Fed raised the Federal Fund Rate of 75 bps to 2.25-2.50% unsurprisingly. The market speculated that rapid rate hike would come to an end and the CPI inflation had peaked with weak energy prices. The stock market showed strength and the S&P 500 Index rebounded 4.6% in the past two weeks. The USD Index was flat at 106.6.

Fearing a lackluster Chinese economy and Cross-strait crisis, Hang Seng Index dropped 2% in the fortnight. RMB declined slightly 0.1% to 6.77 RMB/USD. Hang Seng Index was down 14.3% year-to-day, compared to 13.0% loss of S&P 500 Index or 19.1% drop of NASDAQ Composite Index.

Outlook

Cross-Strait Crisis: US Congress speaker Nancy Pelosi visited Taiwan on August 3, despite of the vehement protest from China. Afterwards, China deployed a series of military drills around Taiwan. The heightened tension worried the financial market and worsened Sino-America relationship. We think this event would eventual calm down and achieve a new balance when all related parties have evaluated the relative military strengths. The world and the financial market would have to adapt to the new normal gradually.

Tech Sector of China: On August 4, Alibaba announced FY23 Q1 results (Q2 of 2022 in calendar). The revenue was flat at Rmb 205.6 billion; and the adjusted earnings was Rmb11.73 per ADS, beating the market consensus. According to market forecast, the EPADS is Rmb40 for FY23 (ending March 31, 2023), suggesting a P/E of 15x. The Chinese stocks in the U.S. exchanges risk delisting among auditing dispute, could possibly be sanctioned, and face the pressure of sales of major shareholders in the case of Alibaba and Tencent. Nevertheless, the valuation is pretty cheap.

COVID-19 Update:  Hundreds of cases were reported in Sanya, Hainan Province recently, resulting in lock-down of this city. The impact to the financial market has been limited so far, as the market is confident that the breakout would be cleared soon. We see the COVID-19 breakout has less effect to the financial market although the COVID-19 policy is unchanged.

Hong Kong Stocks: The valuation of Hong Kong stocks is very low, but its upside trend has been repeatedly hampered by various negative events. We forecast the market is likely go upside lack of any news. It is an opportunity to build up position for long-term investors.