Market uptrend remains intact The Hong Kong market finished July in strong form withthe HSI breaking through the 27,000 level for the first time since June 2015 on strongperformance among blue chips, our favorite segment. Our preferred sectors, tech, autoand insurance, outperformed on a continued strong growth and re-rating outlook, whilematerials, coal and property stocks also rose sharply. We believe increasing southboundtrading (Fig.10), a weakening US dollar (Fig.11), the sustained recovery in the globaleconomy (Fig.12), and improved corporate earnings (Fig.13) have all contributed to thebull run YTD. The outlook should continue to be positive, assuming these factors remainin place.    Short-term headwinds That said, from a short-term or technical point of view, we expectsome headwinds due to valuation and currency concerns. First, the HSI has risen forseven straight months since the beginning of the year, a phenomenon only seen threetimes in the last 20 years, in Apr 2003-Feb 2004 (11 straight months), June 2006-Jan2007 (8 months) and Mar 2007-Oct 2007 (8 months), during which the index rose 61%,27% and 60%, respectively. The HSI rose 24.2% in 7M17, already matching themagnitude seen in 2H06 (Fig.14). Second, while in absolute terms the HSI’s valuation isstill far below that of many global markets, its current 13.1x 2017E P/E is above its mean+1SD (12.9x) during the period since 2010, after the global financial crisis (GFC), and isjust slightly below its 13.7x post-GFC peak in May 2015, making the current valuation lookstretched from a historical point of view (Fig.15 and 16). Any correction in US markets,which are already trading at historical high valuations, well exceeding the average seenafter the GFC, could have a negative impact on the Hong Kong market. Lastly, a possibletechnical rebound in the US dollar. There has been a very strong inverse correlationbetween the US Dollar Index and the HSI since Donald Trump took office. The Hong Kongmarket has risen sharply almost every time the US Dollar Index fell sharply, meaning theHSI is likely to keep rising until the US dollar starts to appreciate again. However, aftermore than 9% depreciation this year, the US Dollar Index is down to a 3-year low, meaningit is vulnerable to a rebound. In fact, July’s strong non-farm payrolls and the Fed’supcoming balance sheet reduction could lead to strengthening of the US dollar in the nearterm. The HK$/US$ exchange rate also weakened to 7.82 recently, the weakest levelsince 2007

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