Asia: Hang Seng Needs a New Catalyst

Having digested a large move, bulls need new reasons to buy.
By Daniel M. Harrison ,

Once again, Asia's key exchange finds itself treading a tightrope between the world's largest economy and the world's fastest-growing one. Against all odds, Hong Kong may be about to make the walk to the other side this time -- but not before a brief wobble.

With consumer price inflation, GDP and retail sales on the agenda in the week ahead, the U.S. and China are creating the classic tug-of-war on capital markets. These announcements couldn't come at a more precarious time.

While Hong Kong's Hang Seng has proved it can hold up over the past five days after an almighty rally the week before, trading volumes are thinning, and it now needs a catalyst to propel any further buying of substance. With the majority of blue-chip and "red"-chip earnings already announced, analysts are not optimistic that one will come.

"Although money markets have stabilized, contagion has spread to currency markets, with countries running current account deficits most at risk. Equities remain trapped between fragile credit markets and slowing growth. Elevated inflation is restricting policy decisions. Being naked or short equities is risky," said Sean Darby, chief Asia strategist for Nomura Bank in Hong Kong, in a research report issued Friday.

"We remain cautious and defensive," says Tim Rocks, chief strategist for Macquarie Bank in Hong Kong. Rocks adds that at the ripe old age of 151 days, the current bear market has already surpassed the average selloff time period, which is 131 days.

But the doom and gloom is beginning to look increasingly academic. This week, traders returned to bargain-hunting, chasing names that were dirty words barely a month ago.

Bank of China

(BACHF)

, the most subprime-exposed bank on the mainland, has gained 8.3% since the beginning of the month, while

China Life Insurance

(LFC) - Get Report

, at nearly half its 2007 high, rose 11.5% in the same period.

One trader was openly bragging about picking up the out-of-favor oil conglomerate

PetroChina

(PTR) - Get Report

on Monday: "Get on board! I am a large buyer today!" he screamed on

Bloomberg

. PetroChina is up 5.2% since the beginning of the month. To anyone who has witnessed the bearish peer pressure that has dominated Hong Kong's social events this year, it appears to be nothing short of a giant U-turn.

Selling activity is turning from fearless short speculating to genuine unloading by a few foreign funds that want to provide some much needed cash flow on their balance sheets. If the funds do unload this time, some of that selling this week may present a buying opportunity for investors who missed out on the first brief run.

"For the coming week, things will look very different to how they did this week," says Alex Tang, head of research at Core Pacific Yamaichi in Hong Kong. "With lots of economic data in the U.S. and China, there will be a clear uptrend or downtrend."

That trend is mostly dependent upon U.S. consumer data and Chinese inflation, according to Tang. If U.S. economic data doesn't disappoint, and China's inflation comes in at less than 8.3%, then the Hang Seng may be able to reach 25,000 points. If not, Tang says there is a bottom to be found around 23,000.

Martin Marnick, a director of Helmsman Global Trading in Hong Kong, concurs. "The index seems to have stalled here, with the resistance set at 25,000 and support at 23,300. For the next week, I'm expecting the Hang Seng to drop and fill the 23,300 gap and build a base to move forward."

Fortunately for bulls, it's not just commodity stocks that are cheap right now, according to Peter So, head of Hong Kong and China strategy for DBS Vickers in Hong Kong. While telcos such as

China Mobile

(CHL) - Get Report

,

China Netcom

(CN) - Get Report

,

China Unicom

(CHU) - Get Report

and

China Telecom

(CHA) - Get Report

have all managed to see off the unwinding of the global economy, insurance stocks such as China Life Insurance and

Ping An

(PIAIF)

have also become so-called "defensive" plays because of their relative value, he says.

Insurance companies feed off Chinese consumption, which shows no sign of slowing. Domestic GDP for 2007 was revised up Friday, to 11.9%, from 11.4%. Other consumer-related stocks include

Air China

(AIRYY)

and

Li Ning

(LNNGF)

, which are among the so-called Olympic theme stocks.

Hong Kong has not been the only beneficiary of a brief reprieve from speculative short-selling. After a volatile ride, the yen shows signs of stabilizing against the dollar, at around 102 yen. While most Japanese exporters price the dividing line between profit and loss at around 105, the lack of volatility in the Japanese currency has helped exporters regain some strength.

If U.S. economic data are badly received stateside, some sharp selling may spread to these exporters. Among the favorites to buy in any such dip right now is the Wii console maker

Nintendo

(NTDOY)

, says Helmsman's Marnick.

With the Wii version of Mario Kart hitting the store shelves in Europe and the U.S. at the end of the month, and out already in Japan, there has been an increase in the number of broker notes speculating about a coming uptick in the shares, says Marnick. Rumors also abound that Nintendo may slash the retail price of the Wii by $100 to coincide with the U.S. launch.

In Asia, it's a case of dollar cost averaging and staying aware of the macroeconomic factors this week, without getting suckered into any rally -- long or short.

Be sure to check out the Far East Portfolio at Stockpickr.com to find out which Indian and Chinese companies are making big moves and announcing major news.

Daniel M. Harrison is a business journalist specialising in European and emerging markets, in particular Asia. He has an MBA from BI, Norway and a blog at

www.theglobalperspective.biz

. He lives in New York.

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