Short seller threat has HK rally skipping small caps

Hong Kong stocks may be Asia’s star performers this year, but it hasn’t done much to revive the fortunes of the market’s perennial underdogs: small-cap shares.

A peek under the hood of the Hang Seng Index’s 25% surge shows it’s being dominated by larger equities, with smaller companies trading at their biggest price discount to the big caps since 2009. That’s despite expectations a trading link between Hong Kong and Shenzhen set up in December would lure mainland money into the former British colony’s smaller shares.

For Hao Hong, the Bocom International Holdings Co strategist who called China’s boom-and-bust equity cycle in 2015, the lack of appetite for small caps comes down to two things: the economy and short sellers.

There are signs China’s economic momentum is waning, read more here.

“In a slowing environment, big caps tend to outperform,” he said, adding that they’re more liquid, often have higher dividend yields and can be more transparent. “Investors are avoiding small caps due to concerns about short selling - it seems that short sellers are increasingly interested in small caps in Hong Kong.”

Short sellers have taken on at least four Hong Kong-listed companies this year, among them snack maker Dali Foods Group Co and furniture company Man Wah Holdings Ltd, a target of well-known short-seller Carson Block. According to Hong, there were only about two short targets a year in Hong Kong before 2014, when the numbers started to pick up.

Small-cap shares also bore the brunt of a selloff in June, when concern over cross-shareholdings inflating their valuations spurred a cascade of losses in a group of stocks.

“Fears about increased short-selling activities around small caps in Hong Kong are definitely part of the reason for investors avoiding small caps this year,” said Francis Cheung, head of China-Hong Kong strategy at CLSA Ltd.

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Conversely, money coming in to the market via exchange-traded funds and support from China’s government-backed funds, known as the ‘national team,’ have fuelled big-cap gains, Cheung said.

But it’s been mainland investors which have propelled the wider Hang Seng’s outperformance this year, as stricter capital controls make the stock connects between Shanghai, Shenzhen and Hong Kong one of the only ways those onshore can get their money into foreign currency.

Net flows in to Hong Kong via the links have come in at more than 240 billion yuan (US$36bil) this year, versus 131 billion yuan for the same period of 2016, when the Shenzhen connect didn’t exist.

While onshore cash is still flocking to Hong Kong, small caps aren’t the attraction. Of the top 10 stocks in which mainland investors hold the highest stakes via the Shanghai and Shenzhen trading links, only two - Guangzhou Baiyunshan Pharmaceutical Holdings Co and China Molybdenum Co Ltd - are members of the Hang Seng small cap gauge.

Source :

1) www.thestar.com.my

2) Bloomberg

Hong Kong small cap stock plunge wipes out HK$42b in value

A string of Hong Kong stocks suddenly plunged Tuesday, with traders pointing to links between some of the companies and a brokerage that's under regulatory investigation.

Sixteen firms tumbled by more than 40 per cent as of 2.46pm, losing a combined HK$42 billion (S$7.47 billion) in market value. China Jicheng Holdings Ltd, an umbrella maker, and GreaterChina Professional Services Ltd sank more than 90 per cent. Lerado Financial Group Co., whore shares were halted by Hong Kong's securities regulator this month, has previously disclosed an investment in China Jicheng and an underwriter role on a GreaterChina share placement in 2015.

The broader Hong Kong market was resilient to the declines on Tuesday, with the benchmark Hang Seng Index losing 0.1 per cent and the Hang Seng Composite Small Cap Index sliding 0.4 per cent. Still, the picture looked more grim on the city's small-cap Growth Enterprise Market, which is home to some of the plunging shares.

The S&P/HKEX GEM Index sank 9.6 per cent, its biggest retreat since August 2015, and closed at its lowest level on record. The gauge has lost more than 90 per cent since 2000.

More news, Hong Kong small cap stock plunge wipes out HK$42b in value

Source : 
1) www.businesstimes.com.sg
2) www.bloomberg.com

Hong Kong set to enjoy economic tailwinds in the 2nd half, but beware of housing risks, BOCHK says

Hong Kong should enjoy economic tail winds in the second half, thanks to an improving global outlook, although extremes in the housing market raise the possibility of unforeseen shocks, according to BOC (Hong Kong) Holdings.

In a presentation on Tuesday the banks said an improved global outlook will help boost trade activity while ultra-low interest rates will continue to support the housing market and other asset prices.

The upturn in activity will also spill over into the city's benchmark Hang Seng Index, which will likely gather momentum to close in on the 27,000-point level, the bank said.

More news, Hong Kong set to enjoy economic tailwinds in the 2nd half, but beware of housing risks, BOCHK says

Source : 
1) www.scmp.com

52-Week High / Low - Wrap Up

After looking at several indices - Dow Jones Industrial Average (DJIA), S&P500, Hang Seng Index (HSI) and Straits TImes Index (STI), it's quite fascinating to see how this strategy turns out on indices from different regions.

From the look of it, the market actions is quite like what been stated in our earlier blog topic "Introduction - 52-Week High / Low" posted on 7 May 2016.
 
When the market exceeds its 52-week high or low, it is not necessary the market actions continue it's preceeding direction but it may reverses.

Seeing that, it makes the analysis more challenging if one to use solely this strategy.

We also noticed the huge opportunities miss when one applies this strategy. Take a look at the chart below. 

(Posted earlier on 15 May 2016 under "52-Week High Low Case Study - Dow Jones Industrial Average (DJIA)").

During the US Subprime Mortgage Crisis, it made a low of 6,469.95 on 6 March 2009 and the market rebounded to 52-week High of 10,228.20 on 9 Nov 2009. 

A total of 3,758.25 points gained from the rebound.

Another example of chart (attached below) with huge points gained from the rebound in comparison to the 52-week High break out.

Big Fat Rabbit !
Huge opportunities not to be missed for long position traders.


Source : 
1) Metastock

52-Week High/Low Case Study : Hang Seng Index (HSI)

During 2008/09 US Subprime Crisis, Hang Seng Index (HSI) touched its 1st 52-week Low of 19,220.28 points on 11 Sep 2008. Thereafter, the market continued its downward and touched a new Low of 16,283.72 points on 18 Sep 2008.

That worked out a huge sum to gain for a short position, with a return of 2,936.56 points.

HSI rebounded to a high of 19,869.02 on 22 Sep 2008 which broke 11 Sep 2008 high of 19,854.82 before it reversed and continued its downtrend - New Lowest of 10,676.29 on 27 Oct 2008 was recorded.

Below is the chart on HSI with 52-week High.

Source :
1) Metastock