Hong Kong Stocks Show Strong Recovery

The Hong Kong stock market has entered a phase of remarkable growth recently, capturing the attention of global investors. Following the May Day holiday, despite a lack of southbound capital inflow, both the Hang Seng Index and the Hang Seng Tech Index soared significantly over two consecutive days, setting a positive tone for trading right after the break. From April 22 onwards, the Hang Seng Index has experienced a striking 10-day winning streak, marking the longest such run since 2018. Such resilience has positioned Hong Kong as a rare high performer, especially highlighted by the notable monthly increases for April, where the Hang Seng Index and Hang Seng Tech Index surged by 7.39% and 6.42% respectively. Both indices ranked second and third globally, only surpassed by Argentina’s MERV index at 9.07%, illustrating a robust rebound in the market.

Historically, the Hong Kong stock market was often labeled as a “discarded” investment zone, particularly after the Hang Seng Index peaked at 33,484 points in early 2018, followed by a prolonged downward spiral that culminated with a drastic fall to 14,597 points in November 2022- an alarming decrease of more than 55%. The tech sector was especially hard hit, with its market capitalization dwindling by over HKD 10 trillion. With daily trading volumes dwindling to barely HKD 80 billion, liquidity became a significant concern, leaving many investors wary of the market’s trajectory.

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However, recent trends indicate a turning tide for Hong Kong’s stock market. This revival can be attributed to three key factors: favorable policies, improved liquidity, and optimistic macroeconomic expectations.

Firstly, numerous government-led initiatives have emerged in 2023, aimed at fostering closer ties between the mainland Chinese and Hong Kong capital markets. On April 19, the China Securities Regulatory Commission announced five measures to enhance cooperation, including easing trading restrictions on exchange-traded funds and incorporating real estate investment trusts into the Stock Connect program. These strategic moves not only strengthen Hong Kong's status as an international financial hub but also buoy investor sentiment and raise market expectations, thereby contributing significantly to the current upward momentum.

Secondly, the enhancement of liquidity in the Hong Kong market has played a pivotal role. Previously, the market’s low performance was largely due to a lack of trading activity, with volumes historically plummeting to disappointing levels. Much of this stagnation stemmed from heavy reliance on foreign institutional investors, whose withdrawals had significantly drained liquidity. This shift occurred primarily due to rising interest rates from the U.S. Federal Reserve and a bull run in Japan's stock market, which diverted foreign investments from Hong Kong to other regions.

Recent shifts in the economic landscape, however, have heralded a new chapter for Hong Kong stocks. Expectations of a delayed rate reduction in the U.S., alongside diminishing prospects for the Japanese economy, have triggered a depreciation of the yen. As investors reassess their portfolios, many have shifted their focus back to Hong Kong, noting a divergence in trends between Japanese and Hong Kong stocks that underscores this pivot. Moreover, the influx of southbound capital has markedly enhanced the liquidity crisis, with net inflows surpassing HKD 70 billion in both March and April, doubling previous figures from earlier this year.

Lastly, positive macroeconomic forecasts for the mainland Chinese economy have further solidified Hong Kong’s recovery. The recent economic meetings have signaled a strong start to 2023, with approval for increased growth and structural improvements in economic performance. This is coupled with a focused approach toward addressing housing market challenges by promoting the balance between supply and demand, which is critical for sustaining long-term growth in real estate and supporting the broader stock market.

Now, the pressing question among investors is whether the Hong Kong market can sustain its upward trajectory following such an extended surge. Analyzing key variables indicates that the prolonged downturn has likely factored in most negative sentiments, making the resilience of the current performance more apparent. With decreasing uncertainties and the accumulation of positive stimuli, the stock market’s intrinsic value is beginning to shine through. Even after a remarkable ten consecutive gains, stocks remain fundamentally undervalued.

Data from Wind illustrates that the price-to-earnings ratios for both the Hang Seng Index and the Hang Seng Tech Index are currently situated within the lower thirds of a 10-year historical context, standing at 33.05% and 19.29%, which significantly undercuts the Shanghai Composite Index’s 53% as well as the NASDAQ and Nikkei 225’s considerably higher valuations. This establishes Hong Kong as an apparent value investment destination, particularly for tech giants like Tencent and Meituan, which boast lower valuations and solid growth potential – attributes that appeal to both domestic and global investors. Additionally, the AH premium index for Hang Seng stocks is still well above its 10-year average, indicating an attractive anticipated return for value-driven investors.

From a broader perspective, both domestic and international investment environments are showing signs of improvement. Nationally, China is adopting a cautious yet positive macroeconomic policy stance paired with ongoing enhancements to real estate regulations which, together with better corporate profit forecasts, have fostered a favorable investment climate. Internationally, the weaker-than-expected job growth figures in the U.S. have diminished fears of aggressive interest rate hikes, fostering a more supportive environment for capital markets.

In conclusion, looking towards the medium to long-term horizon, the Hong Kong market seems to possess considerable upside potential. Despite the recent meteoric rise raising some concerns about profit-taking, which could indicate a temporary pullback, investors should view any corrections as opportunities rather than signs of a nearing peak. For strategic placements, sectors such as technology, healthcare, automotive industries, as well as high-dividend paying sectors like telecommunications and energy represent promising avenues for investment that could yield fruitful returns in the near future.