Monthly Report (2016.5.17)

Market Update

Although we have been right on the Hang Seng Index (HSI) that it would experience a correction after a strong rally since February, the resistance level of this rally was a bit lower than our expected level of around 22500 as global markets retreated in late of April that capped the gain of the HSI.

The current correction since early of May was mainly due to the factors that we have been pointed out in our last report, including: 1) global oil price peaked at around US$46 level and heading for a correction; and 2) rebound of the U.S. dollar (or weakness in Asian currencies), plus some macro factors that we will discuss in more details on below.

In the short-term, we believe the relative change in the U.S. dollar index (esp. the Asian currencies index) will continue to dominate the global market performance. After a technical rebound in the early of May, we expect the U.S. dollar index will resume the downtrend trend again and we probably will see a technical rebound in the Asian markets, including Hong Kong and the HSI index is likely to consolidate in a range between 19400 to 21000 level.

Having said that, in the long-term perspective, we have slightly revised down the possibility that we can find a secular bottom in between 2Q16 to 3Q16 period given the latest global economic indicators continue to show the global economy is still under pressure, such as:

 U.S. private sector job growth in April was well below expectations and the weakest gain in 3 years.

 U.S. small business borrowing continues to fall.

 U.S. banks continue to tighten business lending for the third quarter.

 U.S. and Euro zone retail sales fall sharply in March.

 British manufacturing output at 3 year low.

 China manufacturing activity shrinking for the 14th straight month.

 China’s service PMI and composite PMI in April start to come down.

 China’s export, credit growth, fixed-asset investment, factory output and retails sales all missed forecasts in April.

As said in our last monthly report, the key risk to our bullish scenario is highly depended on the degree of the recovery of the global economy and we are now seeing some signs showing the global economy is reversing course from acceleration to deceleration again.

Though we see the risk of global recession is gradually picking up, we still believe it’s too early to panic about and there is a ray of hope as the Fed in the U.S. has already backed off its tightening bias, analysts are now revising up the 2Q16 earnings for the U.S. corporates, and a prolonged weakness in the U.S. dollar could give support to global commodities and Asian economies. Apart from that, with the new tax reform (effective tax cut) to replace the business tax with value-added tax system is now expanded to China’s service sectors this month, we believe it’s a timely stimulus to China’s domestic consumption in 2H16 and it could have crucial impact on the economy. As such, we might see a rebound of the global economic indicators in the coming quarters after a slowdown in 1H16.

Since our house applies the risk-based approach on the asset allocation strategy, under the current backdrop with the global indicators trending downward again and the potential threat of the exit of Britain from the European Union in June, we continue to believe a defensive approach is still warranted and we have further increased our cash position to around 45%-50%. If we continue to see more signs showing the global recession or systematic risk continue to pick up, we would continue to increase our cash level accordingly.

Nevertheless, as told in our last monthly report, there are two conditions that we would trim down our cash position aggressively to lower positions. One is the global economic leading indicators in the coming period reverse course to show more solid recovery signals and the other one is the valuation of the HSI falls to the historical distress level of around 7x PER, or 15000 to 16000 levels.

(source: Monthly Report, BASE AM, May 17 2016)