- Ukraine conflict and surging cases of Omicron in China caused indiscriminate sell offs in HK
- Historical market crashes with 30%+ drawdowns are financial in nature, and almost always on the back of a market bubble. This is not the case this time
- During major corrections, utilities outperform. Technology, industrial, property and materials do better during the rebound stage
- In view of reduced risk appetite, we revised down 12mth HSI target to 24,600
Indiscriminate selloff as fear reigns. The Ukraine conflict fuelled inflation fears and crushed investors’ risk appetite. Surging Omicron cases in China stoked the fear of a further slowdown in economic growth. The prospects of secondary sanctions on China and selloffs of US listed Chinese stocks drove the HSI down by as much as 4,487 points in 20 days, a bloodbath not seen since the GFC. The fear is strong as VIX and VHSI have hit highs not seen Mar 2020.
Lockdowns from Omicron in China dashes short term reopening hopes. The surging COVID cases in China due to the highly transmissible variant means more lockdowns are in the cards. Reduced economic activities will make it challenging for China to maintain its growth target. This will be reminiscent to 1H20 when supply chain disruption was rampant. The hope is that this time around, with 2 years of experience, actual disruption will likely be lower, contingencies in place and recovery post lockdowns should be smoother.
Revised down 12mth HSI to 24,600 to reflect low risk appetite. Given the severe correction, driven by multiple uncertainties, investors are likely to stay extremely cautious even during bottom fishing. We revised down our HSI target to 24,600 to reflect low risk appetite amid the market overhangs listed above. Referencing deep corrections from past sell offs, sectors such as utilities and staples are preferred, with secular growth stories like new economy and technology carrying the torch once stability is restored. We think policy uncertainties relating to new economy stocks are factored in, and recent sell offs attributed to this is more of a function of the risk averse state of the market, rather than the novelty of the policies. In our top picks, we continue to position ourselves recovering from the market bottom. We replace Alibaba with Meituan to remove the delisting risk, and Meituan can better take advantage of the continual strength in Southbound buying, while the secondary listed Alibaba cannot.