Foreign funds continue to pour money
into Hong Kong, while domestic A-share
investor sentiment finally picks up
 Market may take a breather after 30%
rebound on valuation, US fiscal
concerns and anti-corruption campaign
 It’s not time to go defensive, though
rotation within financials and cyclicals
could be warranted
Since we published our outlook report (China Investment
Atlas, 2013: Market rerating led by growth recovery and
reform, 19 December), the Hong Kong market has rallied
further on continuing expansion of the Chinese economy as
indicated by the latest PMI reading and temporary resolution
of the US fiscal problem.
Key observations and market updates:
 Sentiment is increasingly positive. In December,
foreign mutual funds poured nearly USD5bn into MSCI
China and the number of active A-share trading
accounts rose to 10.5m from a historical low of 5-6m.
 Valuation is normalizing. MSCI China is trading at 10x
forward PE, or a 10% discount to its five-year average;
MSCI HK is trading at par of 15x PE. The exception is
the A-share market, still at a 20-30% discount.
 Performance is widely divergent across sectors. Over
the past month, financials, cyclicals, energy, and
defensives have gained 15%, 12%, 9% and 2%,
respectively.
 Risks: the Chinese communist party may launch an anticorruption
campaign in mid-January; earnings season is
unlikely to impress; and the US “fiscal cliff” and “debt
limit” concerns have yet to be fully resolved.
Consequently, short-term investors may trim positions in highbeta
plays such as property, brokerage, insurance, materials, and
marine shippers. We remain positive on the whole-year market
outlook, overweight financials and cyclicals, and recommend
buying laggards in our HK/China model portfolio: Li & Fung
and Zoomlion Heavy Industry (Asia Super Ten stocks),
Golden Eagle and China Resources Cement.