Review and Outlook (July 25, 2022)

Fortnight in Review

On July 13, US published CPI inflation of 9.1%, a 30-year high. The Fed will decide the interest hike on July 27. According the Fed rate futures, the probability of 75 bps hike (to 2.25-2.50%) is 77%, and the probability of 100bps hike (to 2.50-2.75%) is 23%. The market speculated that the CPI inflation had peaked with weak energy prices recently. The stock market was simulated, showing a V-shape rebound. The S&P 500 Index was up 1.6% in past two weeks, and the USD Index declined slightly 0.2% to 106.64.

Fearing a funding chain breakdown of the Chinese property industry, coupled with a weak consumption, Hang Seng Index dropped 5.4% in the fortnight. RMB declined as well 1% to 6.76 RMB/USD. Hang Seng Index was down 12.1% year-to-day, compared to 16.9% loss of S&P 500 Index or 24.4% drop of NASDAQ Composite Index.

Outlook

Mortgage Payment Freezing: Responding to the halt of some construction sites, the owners decided to freeze the mortgage payment. In theory, the owners are responsible for the payment before the completion or delivery of the property they have bought. This caused some panic to the banks. Besides, it is reported that Everglande Group had misappropriated Rmb 13.4 billion from Everglande Property Services. The Central Government has deployed a series of methods to ensure that property will be delivered, including some hundreds of billions funds. We expect no material impact to the banks, while there are huge impact to property stocks and bonds. We see no chance for the companies like Everglande to stay on the game, and state-owned enterprises such as COLI or Poly Property would expand eventually.

Fed Watch: It is now well expected the Fed will raise the fund rate by 75bps or more, yet the market seemed to inadequately react to this scenario. In June, the market plummeted before the rate hike and only to stabilize after the announcement. This time, it might be that the market would decline after the announcement. Another concern is the coming financial reports of major companies such Apple, Microsoft, Google and Amazon, which will definitely impact the market.

Hong Kong Stocks: We have seen continuous bad news this year, including COVID-19 outbreaks, property markets, rural banking crisis, and weak job market and consumption. Plus the rate hike cycle in the US, the Hong Kong stocks had some corrections. Even though, the stock market had been resilient so far, and tended to rebound lack of any news. We see little impact of the US rate hike, and we believe the crisis will be eventually conquered. It is time to accumulate stocks as the worst is probably behind us.