(Yicai Global) March 9 -- China’s stock markets have been under pressure as yields on US Treasury bonds, the anchor of global asset pricing, have been rising steadily, leading to a repricing of global assets, while in China, normalization of monetary policy and fund redemptions have made investors more cautious.

The yield on US Treasuries was 1.577 percent as the market closed on March 6, up almost 70 basis points from the start of the year. The surge is rattling markets, prompting global investors to shift into cyclical and safe haven stocks and out of tech plays, which did well during the pandemic. 

The Shanghai Composite Index and Hang Seng Index yesterday closed down 2.3 percent and 1.98 percent, respectively, amid net outflows of CNY8.6 billion (USD1.3 billion) from the mainland to Hong Kong and HKD13.2 billion (USD1.7 billion) from Hong Kong back to the mainland.

Inflation and the expectation of rising interest rates have hit the high valuations of US tech stocks, which are particularly sensitive to interest rate changes. In consequence, the Nasdaq-100 Index fell as much as 11.4 percent from a year-to-date high of 13,879.77 to lose all of its gains for the year so far.

Bull market-believer Ark Invest, which has bet heavily on Bitcoin and shares of disruptors such as Tesla, suffered big losses, with its ARK Innovation exchange traded fund down as much as 26.7 percent to 117.07 from an all-time high of 159.7.

Correction pressures will remain in the short run as US treasury yields are likely to keep rising, said Mike Wilson, chief US equity strategist at Morgan Stanley.

The US investment bank cut its forecast for the S&P 500's price-to-earnings ratio over the next 12 months to 20 times from 21.5 times, citing an inevitable increase in interest rates. 

Price Adjustments

Regarding the mainland market, changes in market-driving stock sectors and position adjustments continue to hit high-priced shares and overall index valuations. Shares held by institutional investors have seen price adjustments, with weaker ones nearing the 200-day moving average and stronger ones still around the 50-day moving average, Wendy Liu, head of China strategy at UBS Group, told Yicai Global. 

“There used to be disturbances from both macro and micro fields, which caused a larger correction in firms' valuations,” she said. “But as long as the business is doing well, it is a buying opportunity.”

Investment ideas over the past two years may need to be changed, and the key is still matching valuation and business performance, according to Du Meng, investment director at China International Fund Management. 

Besides the hit from macro events, the Hong Kong market was also shaken by a rise in stamp duty which is set to increase transaction costs by 30 percent. The duty accounts for 88 percent of the cost of trading shares in Hong Kong, and a 30 percent hike would significantly increase the cost of investing in the mainland. 

The authorities decided to lift the duty to 0.13 percent from 0.1 percent after consideration of the impact on the securities market and Hong Kong's international competitiveness, Financial Secretary Chan Mo-po said on Feb. 24, when he submitted the city’s budget plan for the 2021-2022 fiscal year to the legislative council. A further increase in the rate is also possible, Chan said on March 2. 

Stock values typically come down a bit in the spring and do best in the summer, said Liu from UBS. Whether investors will be willing to enter the market after institutional investors have made adjustments depends on whether Treasury yields stabilize, what happens to credit data in February and March, and how good corporate earnings are, she said, adding that the timing of a market reversal may be around mid-March to April.

Editors: Xu Wei, Tom Litting