Publications
Partners
Hong Kong - A rally in Hong Kong equities that’s made them the hottest in Asia is seen continuing through year-end, buoyed by increased access for mainland funds and a stabilising Chinese economy.
The Hang Seng Index jumped 12% last quarter, its best performance since 2009, as flows through an exchange trading link with Shanghai swelled to a record and traders pushed back bets for higher US borrowing costs.
That was the biggest gain among Asian benchmark indices tracked by Bloomberg.
While the advance has driven valuations on the city’s benchmark gauge to the highest in five years, the index is still 40% cheaper than MSCI’s measure of global shares on a price-earnings basis.
A second trading channel with Shenzhen will start this year, increasing the amount of shares mainland investors can buy. Concern about China’s slowdown has ebbed after a string of data showed the economy is maintaining equilibrium.
“Hong Kong valuations remain supportive,” said Sandy Mehta, Hong Kong-based chief executive officer of Value Investment Principals. “The upcoming Shenzhen connect will also draw global attention to the market. Any boost to Shenzhen will drive Hong Kong."
Hong Kong’s $4.1trn stock market is recovering after turmoil in Chinese financial markets and fears of an economic hard landing sent the Hang Seng Index plummeting 36% in the space of 10 months.
That dragged the gauge’s price-earnings ratio below 9 times in February to its lowest level since 2011. The measure now trades at 12.8 times reported earnings, compared with the MSCI All-Country World Index’s 21 multiple.
The Hang Seng Index climbed 0.4%, its highest level in a month and erasing an earlier loss of 0.5%.
While investors are growing more confident about the outlook for Hong Kong shares, with the Hang Seng Index climbing about 8% this year, the same can’t be said about their yuan-denominated peers.
The Shanghai Composite Index is still down 15% as state intervention keeps the mood among local traders subdued. The widening gap is helping lure mainland funds into Hong Kong equities in the run up to the start of a new link with the technology hub of Shenzhen.
Aberdeen Asset Management Plc has an overweight position on the Hang Seng Index, the 50-member gauge which has Tencent, HSBC and AIA as its top weightings.
Risks remain
"We are comfortable with valuation and quality of stocks," said Hugh Young, Singapore-based managing director at Aberdeen Asset Management with assets of about $420bn. "In many ways, we prefer it to direct mainland China exposure.”
Of course, there is no shortage of risks that could derail the rally. Hong Kong’s economy is on shaky ground, with a retail slump deepening amid falling visitor arrivals.
Odds are increasing that the Federal Reserve will raise interest rates at its December meeting, which would result in higher borrowing costs in the former British colony thanks to the city’s currency peg with the greenback. Signs of frothiness in China’s housing market are prompting some analysts to predict policy makers will tighten monetary policy next year.
Tony Hann, the head of equities at Blackfriars Asset Management in London, is on the side of the skeptics when it comes to Hong Kong stocks. He says there is no guarantee that mainland funds will continue to support the market, while a "negative surprise or two" out of China may cause investors to change their bullish outlook.
Economic data
"We are underweight Hong Kong and China," said Hann, whose Blackfriars Oriental Focus Fund has outperformed 94% of its peers this year with a 28% return.
"No plans to change this. Hong Kong has benefited from increasing activity on the southbound leg of the Shanghai connect. It is not clear if this will be sustained through the fourth quarter."
Still, the latest economic data are adding to the upbeat tempo in Hong Kong. China’s official factory gauge stayed at the highest level in almost two years last month and its services index increased. The Bloomberg Intelligence China gross domestic product tracker rose to 7.16% in August.
"The economic backdrop is much healthier compared to a year ago," said Jing Ulrich, JPMorgan’s Hong Kong-based vice chairperson of Asia Pacific. "The current valuation of the Hong Kong market remains low. The launch of the Shenzhen stock connect is expected to attract more southbound funds from China."
Read Fin24's top stories trending on Twitter: Fin24’s top stories
