Review and Outlook (June 27, 2022)

Fortnight in Review

On June 16, The Fed announced a rate target hike of 75bps to 1.50-1.75%, a radical move to deal with the 8.6% CPI inflation earlier. The US market then rebounded afterwards showing a V-shape, due to lack of further events. The S&P 500 Index was flat at 3900 in the past two weeks; The USD Index declined slightly to 103.97 from 104.70.

Hang Seng Index has been resilient, rising 210 points (+1%) during the past two weeks. RMB rose against USD slightly to 6.70 from 6.75 RMB/USD.

Hang Seng Index was down 6% year-to-day, compared to 18.2% loss of S&P 500 Index or 26.3% drop of NASDAQ Composite Index.


Fed Watch: As we stated in the past issue, the direct reasons of high inflation include tariff against Chinese goods, supply chain chaos, energy and food crisis from Ukraine-Russia conflict. A rate hike would not be immediately effective without measures to address those reasons. Unfortunately, there is no easy solutions to any of them. The dilemma of the Fed is: Continuous rate hike would not be effective to curb inflation but will likely impact the financial market; yet doing nothing about rates would be “politically incorrect” and would be the scapegoat of high inflation. It would be a challenge for the Fed to balance inflation concern and financial market.

The US equities are still expensive. The P/E of major consumer stocks is around 25x. The bubble of tech and Internet sectors remains despite recent correction. Semiconductor sector is facing headwind. The US stock market is gambling with the Feb: investors prefer a bad economic indicator (such as Non-farm payroll) rather than a good one, hoping the decade-long monetary easing would resume.

China’s Policy Outlook: The Chinese authorities adopted an easy monetary policy. The recent RMB sovereign debt issued in Hong Kong registered a yield of 2.44% for 2-year and 2.75% for 5-year; at the same time, the yield is 3.08% for 2-year and 3.27% for 5-year for the US treasury bonds. Besides, the central government has issued multiple pro-growth policies. The COVID-zero policy was loosened recently.

Hong Kong Stocks: The market has reason to anticipate a better environment as July 1 draws near. China’s easy monetary policy, pro-growth measures, and resumed economic growth would all contribute to a bull market. Our top pick is still tech and Internet sector, followed by biotech and medicine, as they have over-corrected in the past year and have high betas in a rising market.