Property, financial sectors particularly vulnerable to interest rate increases

Concern about US interest rate hike has prompted BlackRock Inc, the world's largest asset manager with over $4.77 trillion in assets under management, to underweight Hong Kong financial and property stocks.

The city's benchmark Hang Seng Index rose 0.7 percent on Wednesday to close at 26,753.8. The index rebounded from a two-month low on bargain hunting, stock analysts said. But the low turnover of HK$120.8 million on main board suggested that many investors were still waiting on the sidelines, the analysts said.

Andrew Swan, head of Asian equities at BlackRock, said that the expected US interest rate hike would exert pressure on Hong Kong's property sector and its financial industry. He said BlackRock will reduce its holding of stocks in those sectors. But it is bullish about the prospect of Internet-related and healthcare sectors because they are less rate sensitive.

Neeraj Seth, head of Asian Credit at BlackRock, predicted US Federal Reserve (Fed) will not raise interest rate before September 2015. "The Fed's tightening has the potential to threaten the dynamic supporting the global hunt for yield," Seth said. "Now is the time for increasing credit quality, and Asia strikes the right balance of quality and yield," he said.

Seth said he is positive that the economies with strong reform momentum such as India's and the Chinese mainland's, which are making significant progress in structural reforms.

However, Swan didn't deny the bubbles in some mainland-listed stocks, especially in the small and medium-sized caps segment.

He said he expects that the blue chips stocks in the mainland market benefit from the reform agenda.

"Beijing will further cut interest rates and continue its easy monetary policy," Swan said. Although the central bank has reiterated that it has no intention to pursue a Western-style quantitative easing program, it has taken measures to pump capital into the banking system by cutting the reserve requirement and lowering interest rate.

Economists said that they expected additional rate cuts in coming months, together with further reduction of the reserve requirement. A renewed inflow of capital into the market could trigger another buying spree pushing share prices to new highs.

But stock analysts said that it is hard to predict if such a rally on the mainland would have too much of an impact on the Hong Kong stock market, which is troubled by other external issues, including the specter of rising interest rate and the fallout from a possible Greek default.

For that reason, many analysts are underweighting Hong Kong while maintaining a more bullish outlook for Chinese mainland stocks.

"We have moved to our position away from cyclical holdings to ones that will have steadier but longer-term growth potential and benefit from this changing cycle," said Swan.

"Chinese (mainland's) policy implementation is focusing on stabilizing growth, rather than jump-starting a new growth cycle."

The Shanghai Composite Index closed at 4,967.9, up 1.7 percent from the day before, regaining some lost ground in the previous slide.

Swan said the implication being that the Chinese mainland will enter a distinct cycle of slower, but less cyclical and more stable growth based on structural reform.

celia@chinadailyhk.com

BlackRock Inc, a prominent global asset manager, says it is retreating from the property and financial stocks traded in the Hong Kong bourse. Instead, the firm is bullish about the sectors that are less sensitive to the possible US interest-rate hike, such as Internet-related and healthcare companies. Parker Zheng / China Daily

(HK Edition 06/18/2015 page7)