The outcome of this week’s US-China trade talks in Washington is anybody’s guess. But one thing is certain – stocks will react. And this presents an opportunity for some savvy trades in the Hong Kong and mainland China markets.
High-level officials, including Vice-Premier Liu He and the US Trade Representative Robert Lighthizer, will meet on Wednesday and Thursday in Washington, with the aim of discussing such hot-button issues as trade imbalances, “forced” technology transfers and intellectual property protection.
Hong Kong and the mainland are 13 hours ahead of Washington, but expect markets here and in the United States to react to any hints, headlines and the like emanating from the talks.
“The [Hong Kong] index will perform well [during the week] – both parties are willing to sit down and talk and work out a deal,” said Louis Tse Ming-kwong, managing director of Hong Kong brokerage VC Asset Management.
The outcome could have a particular impact on automobiles, agriculture, electronics and 5G technology, as well as pharmaceuticals. Trading carries personal risks that the South China Morning Post is not responsible for.
Mainland Chinese carmakers were among the hardest hit last year as an escalating trade war deterred car buying. Sales in China, the world’s largest auto market, fell by 6 per cent in 2018, their first annual decline in more than two decades. Companies from dual-listed Guangzhou Automobile Group to Hong Kong-traded Geely Automobile Holdings slumped by at least 42 per cent.
If the talks are unsuccessful and the negotiators slam the brakes, expect further declines in automobile stocks, said Justin Gerbereux, director of credit research at T. Rowe Price. A rebound is probable if the discussions are successful.
The Chinese suppliers of US electric carmaker Tesla are also worth a look in this week, with Beijing temporarily suspending a 25 per cent tariff on cars imported from the US.
Chinese grain and seed stocks, such as Heilongjiang Agriculture, Jiangsu Provincial Agricultural Reclamation and Development and Gansu Yasheng Industrial Group stand to benefit if the talks do not yield any positive results. Beijing relies on the US for a third of its soybean imports and a deadlock will fuel a thematic investment opportunity, on the assumption that a strain in supply will push up prices of domestic agricultural products.
Tech and 5G
Many of the industrial categories that come under Beijing’s Made in China 2025 plan involve the development of hi-tech manufacturing, a sector targeted by US President Donald Trump’s trade war.
One of the main reasons the White House started the trade war was to slow down the rise of this hi-tech industry, according to Huachuang Securities, although Washington has signalled its motive is to bolster the production of sensitive technology back home and thwart spying, hacking and intellectual property theft.
It will be worth listening closely to anything said by either side about technology.
The controversy around the detention of former Huawei Technologies’ chief financial officer Sabrina Meng Wanzhou could also affect technology sector stocks.
Huawei itself is not publicly listed, but any developments could impact other, associated companies that are. It is also worth keeping tabs on ZTE, a major Huawei rival that is listed in Shenzhen and Hong Kong. The company was almost put out of business for a couple of months last year, after the US banned sales of key technologies to it for breach of sanctions against Iran.
Thematic investment opportunities may arise at China’s home-grown chip makers such as Dawning Information Industry,amid expectations of more policy support for key technologies in an effort to wean them off reliance on US imports.
Health care stocks may be prone to swings, in case the talks fail, according to analysts. It is one of the few industries that are not too exposed to swings in the economic cycle or external demand. A near 40 per cent decline from a high in May has also left valuations in the sector less stretched, making a bounce back more likely and plausible.
Domestic policies might, however, hold back any gains. Investors are still concerned the impact of a pilot government tender aimed at significantly lowering the prices of generic drugs has not been fully priced in.
The broader market
The benchmark Shanghai Composite Index has made a good start to the year, throwing up a gain of 4.1 per cent so far, after slumping by 25 per cent in 2018. In Hong Kong, the Hang Seng Index is up by 6.7 per cent for the year.
These gains are driven mostly by optimism around the US-China trade talks, as well as foreign fund inflows, according to Chen Li, chief economist at Soochow Securities. If the talks do not deliver, the appetite for risk is very likely to be hurt and the ongoing rebound in China and Hong Kong stocks will be put to the test.
VC Asset Management’s Tse said he expected a positive week for the Hang Seng Index.
If the US-China talks do go well, he said he expected shares in banks and property companies to benefit. If the talks fail, he said utilities, with their good yields and low price-to-earnings ratios, were worth a look. If it is somewhere in between, look at industrial stocks and other “second liners” smaller than blue chips, such as Kingboard Holdings, he added.
Additional reporting by Louise Moon