China's new regulations on fintech, big tech, after-school tutoring, cryptocurrency, and carbon emissions over the past nine months may have long term positive implications, but in the near term, they have mauled the markets, in particular the Hong Kong market.
Under the new governance paradigm, China appears to be attempting to check the rise in corporate power and rebalance the share of the economy in favour of labour, which could result in decline in corporate profit share, notes Morgan Stanley in an Aug 20 report. “We see regulatory head- winds for sectors associated with rising tensions of social inequality, environmental sustainability, and data security risks, while the new framework provides policy support to advanced manufacturing, tech localization, and renewable energy,” Morgan Stanley says. The risk, is over-regulation, it adds.
Hence, data-heavy tech and platform companies and property could remain under pressure amid the regulatory reset, while semi localization, cybersecurity, domestic brands catering to the mass market, innovative drugs, bio- tech, and green economy may enjoy support, according to Morgan Stanley.
Technically, the Hang Seng Index had already fallen below its 200-day moving average back in early July. The decline was exacerbated in early August when the 50- and 200-day moving averages made a negative cross. As at Aug 20, the 200-day moving average is at 27,976 and the 100-day moving average is at 28,028 suggesting that these two moving averages will form a dead cross on Aug 23.
Despite short term oversold lows, both 21-day RSI and quarterly momentum have not shown signs of bottoming or formed positive divergences with the index. Hence, a break 25,086, the low in March, which occurred on Aug 20, indicates a downside objective. The HSI ended the week of Aug 16-20 at 24,849. The immediate downside is at 23,512.
The Straits Times Index which had held out against the selling onslought in North Asia for the past three months, succumbed to selling pressure in the week of Aug 16-20, losing 63 points week-on-week to end at 3,102. The decline takes the STI to below key supports such as the 50- and 100-day moving averages at 3,144 and 3,157 respectively. Support is next at 3,033.