Renowned analyst and Chief Investment Officer of Lianhua Asset Management, Hong Hao, recently shared his latest analysis and outlook on the Hang Seng Index, liquidity conditions, and the likelihood of further Fed rate cuts in an interview.
Hong pointed out that despite Fed Chair Jerome Powell stating that a December rate cut is "far from certain," given the current tight liquidity, the resurgence of regional banking crises, and persistently high inflation pressure, another 25-basis-point rate cut in December—along with a halt to balance sheet reduction—is now a "high-probability event." He emphasized that liquidity issues remain the primary risk in the current economic system, necessitating preemptive measures from the Fed to stabilize markets.
Regarding Hong Kong stocks, Hong expressed optimism, projecting the Hang Seng Index to reach 30,000 points—analogous to the Shanghai Composite hitting 4,000. He believes the market remains overly pessimistic, as this year's technological breakthroughs have yet to be fully reflected in stock prices. He remains bullish on banks, non-ferrous metals, and select successfully transformed tech companies.
In terms of investment strategy, Hong advised investors to stay patient, focus on value sectors, and emphasized earning "money within one's circle of competence" to rationally navigate market volatility and cyclical shifts.
**Fed: December Rate Cut Almost Certain** When asked about Powell's "foggy driving" metaphor amid the government shutdown, Hong noted that global inflation has consistently exceeded expectations, with 40% of U.S. CPI components currently estimated due to missing data—an unprecedented situation. He argued that tariff impacts make U.S. inflation structurally sticky, reinforcing the inevitability of a December cut. Market pricing briefly dipped from 90% to 60% post-Powell but remains firmly in "high-probability" territory. With real rates still positive even after a 25bp cut, combined with resurfacing regional bank liquidity crises and private credit stress nearing pandemic levels, the Fed has little choice but to ease, Hong asserted.
Looking ahead to 2024, Hong acknowledged potential for a 50bp cut if economic conditions deteriorate but deemed it premature to speculate. He stressed that Fed decisions through year-end would continue supporting markets.
**Balance Sheet: Pause ≠ Expansion** While the Fed will halt quantitative tightening (QT) in December, Hong dismissed expectations of aggressive balance sheet expansion unless systemic risks emerge. He highlighted how surging U.S. Treasury issuance has offset monetary tightening this year, but warned that maintaining fiscal deficits at wartime levels (9% of GDP) risks fueling inflation and commodity prices further if sustained.
**Hang Seng Target: 30,000+** Hong predicted the Hang Seng could break higher easily with catalysts like extended U.S.-China tariff truces, rare earth supply resumptions, Fed easing, southbound inflows, and domestic policy support. The 30,000-point target—akin to the SSE Composite's 4,000—reflects undervaluation of recent tech advancements, he argued, criticizing excessive market pessimism.
**Sector Rotation: Banks, Metals, Tech in Focus** Hong sees greater potential in value stocks, particularly banks (e.g., Agricultural Bank of China's surprising 20% two-week rally) and industrial metals (copper, aluminum), whose uptrend he believes has just begun. While copper prices have surged past $10,000, other base metals remain undervalued, with Aluminum Corp of China (Chalco) jumping 10% in a single day on October 30. He also singled out unnamed tech firms with successful transformations poised for new highs.
Conversely, he warned about overheated "new consumer" stocks now correcting amid broader market gains, noting such rotations typically last 2-3 quarters.
**Investing Wisdom: Stick to Your Circle of Competence** Hong cautioned against chasing every hot trend, citing examples like gold, silver, and biotech where his team missed other opportunities. Quoting a Chinese market adage—"money earned by luck will be lost by luck"—he urged investors to focus on understandable, sleep-well-at-night holdings that align with their knowledge.
