Tuesday, January 28, 2020
Martin Hennecke

Alibaba to bolster Hong Kong stocks
China signalled fresh hopes of a trade deal yesterday as the Hang Seng Index rose to a three-month high but index heavyweight Tencent (0700) was barely changed. It is not difficult to understand why Tencent is feeling the heat as its rival Alibaba has reportedly sought approval from the local bourse for a listing hearing next week. Since this will be Alibaba's second listing, the IPO is likely to be executed very quickly once the hearing is over. Alibaba enjoys a stature similar to Tencent's and the internet giant's return to Hong Kong will throw up new equations. Just like in a family where the mother has just had a second child, the older sibling, who was the apple of his parents' eyes, will now feel his position is threatened. As it gets closer to Alibaba's listing date, funds are likely to reduce their stakes in Tencent as investments are reallocated. This could be why Tencent's recent performance on the market has not been as stellar as before. Hong Kong stocks have been resurgent in recent days mainly because of growing optimism over the trade deal. Some even reckon that if the first-phase agreement is signed, it will be easy for the Hang Seng Index to hit 30,000 once more, a level last seen in May. However, I would take these bullish predictions with a pinch of salt. Because once the United States and China sign on the dotted line, there is every chance that investors across global markets - including the United States - will decide to cash in because it is unlikely that the US Fed will further cut rates until early next year. As for the second phase of the trade agreement, let's not go there yet. Public hearings in Congress begin next week in the impeachment inquiry of President DonaldTrump and with presidential elections due next November, the next round of negotiations are bound to throw up thorny issues, and put a damper on the markets. Both China and the United States are keen to initial the first-phase deal but now that Chile has canceled the Apec summit, the debate is on where the signing should take place, with dozens of venues, including London, touted as possible choices. By now, Trump would normally be having a go at China on Twitter, but he has not been his usual self and surprisingly quiet. This shows how anxious he is to win large agricultural orders from Beijing so that he can prop up his falling voter base. Earlier reports indicated that Beijing wanted a rollback of tariffs on $$325 billion worth of Chinese goods ahead of a December signing, and yesterday, the Chinese commerce ministry said China and the United States have agreed to cancel in phases the tariffs imposed over the course of their trade war, without specifying a timetable. But whether agreements are reached or not, I believe the optimism expressed by both sides are just smokescreens to cover just how tough the negotiations really are. Therefore, the stock market will continue to be a headline-driven in the short term. Looking ahead, a failure to sign a trade pact will definitely be unfavorable for the market, but a deal is not necessarily a good thing either. Short-term support for Hong Kong stocks however may come from Alibaba's potential listing. Major investors will like to stay in the market ahead of the IPO, so even if there's an adjustment, it will not be significant. But since the market is always a battlefield for major investors, and if the inference that a deal may also hurt the market is true, we can't rule out the possibility that some major players will take advantage of the Alibaba IPO to sell off equities in hand before its listing to Alibaba backers. Investors may choose to sit on the fence - otherwise, they should hand-pick their stocks instead of speculating on market sentiment.
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