China stocks were steady on Wednesday despite a pull-back in the banking sector, as investors bet sectors such as airlines and real estate will benefit from a resurgent yuan against the dollar.
Hong Kong's benchmark index followed Asian markets higher, and is set to close at the highest level since May 2005, helped by easing geopolitical tensions, as well as signs mainland money continues to flow steadily into the city's bourse.
China's bluechip CSI300 index rose 0.1 per cent to 3,836.36 points by the lunch break, while the Shanghai Composite Index was unchanged at 3,364.32 points.
As the largely bright half-year company earnings season draws to a close, investors are pondering about the outlook and if the strong growth is sustainable.
Chinese brokerage Guosen Securities is bullish on China stocks, after the Shanghai market held firmly above the 3,300-point-mark this week, a level previously seen as a strong resistance.
“Economic recovery is expected to kick China's A shares into a bull market,” Guosen analyst Yan Xiang said in its latest strategy report.
“Currently, we could be at the turning point of the economic cycle,” Yan said, citing strong economic data, robust commodity prices and modest inflation.
UBS, however, was less sanguine about the outlook. Gao Ting, Head of China Strategy at UBS Securities, said: "We think earnings growth momentum likely peaked in H1, and with economic growth set to slow and margin pressure emerging, earnings growth should decelerate over the rest of the year.”
Still, Gao said he hasn't seen any negative “catalysts that would bring down the market in the near term.”
Airline operators surged in both China and Hong Kong, as investors bet that the sector - typically burdened with heavy US dollar debt - would benefit from a strong yuan, which on Tuesday strengthened and breached the psychologically important 6.6 per dollar level for the first time since June 2016.
Major carriers including China Southern Airlines , Air China and China Eastern Airlines all posted strong gains.
Real estate, another sector potentially benefiting from a strong currency, also rose sharply, aided by improving industry fundamentals as well.
But banking stocks retreated following strong gains recently, with some investors pocketing gains after major leaders released their results.
Hong Kong
In Hong Kong, the Hang Seng index added 0.8 per cent, to 27,983.38 points, while the Hong Kong China Enterprises Index gained 0.7 per cent, to 11,369.05.
The past week has witnessed a sharp rise in net inflows from the mainland, and “we believe insurance companies will continue to be a major player and contribute to southbound transactions," UBS' Gao said.
Those with high dividend yields or large A/H premiums and those that are scarce in the HK market are likely to be favoured.”