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  Market Analysis
Riding the Inflation 
The Hong Kong stock market had a bumpy ride in the early part of the year, something we have seen during the same period last year. Increasing policy and geopolitical risks are major factors to blame while inflationary pressure also knocks on the door.
In economic term, inflation is defined as "a rise in the general level of prices of goods and services in an economy over a period of time". Inflation occurs when an economy grows. However, it creates pain when people's wealth and purchasing power are weakened by inflation. Investors may bet on real estates, precious metal or equity investments to overcome the inflation. They are all logical wisdoms but there are many details that further scrutiny is needed. For stock selection, we prefer to overweight upstream sectors (e.g. commodities) while more cautious on downstream players in inflationary environment. This is because many downstream firms simply cannot pass though the rising labour and raw material costs to their customers. As a result, their gross profit margin drops significantly and even reported losses. By the same token, upstream player have much stronger power to transfer higher costs to the selling price and thus suffer less. Besides, some luxury goods companies are likely less affected by inflation amidst superior pricing power as well as unique target customers.
Among a variety of commodities, we should pay special attention to oil. Oil price skyrocketed to the level of nearly US$150 per barrel before the world was hit by the global financial crisis. Despite the recent upward trend in international oil prices, it is still standing at far below the historical high. Factors include global economic recovery and political turmoil in the Middle East plus massive speculative activities, all point to a bullish picture for oil and we definitely cannot overlook it. Besides oil, several non-ferrous metals (e.g. copper) and coal are also worth mentioning.
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Mr. Peter Pak
Executive Director
BOCI Reserach Limited
April 2011 |
Remarks: In case of any discrepancies between the Chinese and English version of this article, the Chinese version shall prevail.
Risk Disclosure:
This document is prepared for reference purpose only. The above views are the personal opinions of the author. The content herein is not intended to provide professional or investment advice and should not be relied upon as such. This document is prepared on the basis of materials obtained from sources believed to be reliable but accepts no liability in relation to the use of this document or the content herein for any purpose. The Bank does not make any representation or warranty and accept no responsibility or liability as to the accuracy, completeness or correctness of the content herein. The content herein is subject to change without notice. You are advised to seek independent financial and professional advice before you trade or invest. You should carefully consider whether trading or investment is suitable in light of your own financial position and investment objectives. This document does not constitute an offer or an invitation to any person to sell, purchase, subscribe or transact any product or service mentioned herein. Investment involves risk. The prices of securities, funds and other investment products may fluctuate, sometimes dramatically. The price of securities, funds and other investment products may move up or down, and may become valueless. It is likely that losses will be incurred rather than profits made as a result of buying and selling securities, funds and other investment products. Past performance is not indicative of future performance. You should carefully read the offering documents for details before making any investment decision. The Bank, its related companies, their directors and/or employees may have positions in, and may effect transaction in, the products and services mentioned herein. Foreign currency investments are subject to exchange rate fluctuations which may provide both opportunities and risks. The fluctuation in the exchange rate of foreign currency may result in losses in the event that the customer converts the foreign currency into Hong Kong dollars or other foreign currencies. Bank of China (Hong Kong) Limited will not be liable for the quality of products and services provided by the participating merchants. The tables and diagrams are for reference only.
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