Hong Kong Stock Market Awakens From Nightmare as Bulls Return

The Hong Kong stock market is showing signs of life again after a prolonged downturn, with bullish sentiment returning to the city. Propelled by a refocusing among investors and some positive macroeconomic factors, the Hang Seng Index has rallied over 10% in the past three weeks, awakening from its months-long nightmare slump.

After peaking in early 2021 and then trending down for much of 2022 and into 2023, the Hang Seng plunged to its lowest level since April 2009 in October. However, the tide seems to be turning now as bargain hunters swoop in to snap up shares of Chinese tech giants like Tencent and Alibaba at fire sale valuations. Regulatory pressures on the mainland appear to be easing as well, boosting investor confidence.

“Sentiment has done a complete 180 recently after the excessive pessimism reached an extreme point a few weeks ago,” said Chen Li, an equity strategist at CMB International Securities. “The Hong Kong market was completely written off by international investors, but local players saw this as a golden buying opportunity with blue-chip stocks trading at just a fraction of their historic valuations.”

The Hang Seng’s strong rebound signals that the storm clouds hanging over Hong Kong’s stock market may finally be dissipating. As the index claws its way back from the abyss, bulls are returning in droves while the bears retreat. For long-term investors, the recent recovery could mark an attractive entry point.

Reasons for Renewed Optimism

Several factors are contributing to the restored optimism among investors, driving money back into Hong Kong equities. Firstly, China has rolled back some of its strict zero-COVID policies, boosting hopes for an eventual full reopening of the economy. A pickup in growth on the mainland would have spillover benefits in Hong Kong.

Additionally, relations between China and the West seem to be thawing somewhat after hitting a nadir last year. During his meeting Chinese President Xi Jinping at November’s G20 summit, U.S. President Joe Biden secured Xi’s commitment to resume climate cooperation between the two superpowers. The potential de-escalation of tensions is another tailwind for Hong Kong equities.

Geopolitical tensions definitely cast a cloud over Chinese stocks in 2022. So any reduction in friction or concrete progress towards compromises would be cheered by investors,” commented Walter Chen, head of Asia-Pacific equities at AllianceBernstein.

Hong Kong Monetary Policy Outlook More Supportive

Besides the changing macroeconomic landscape, Hong Kong’s shift to a more dovish monetary policy stance is also playing into the hands of equity bulls. After half a year of marching in lockstep with the Federal Reserve’s interest rate hikes, the Hong Kong Monetary Authority (HKMA) has split from this trajectory.

With the Hong Kong dollar pinned to the greenback under the city’s long-standing currency peg system, the HKMA typically mirrors Fed rate moves to maintain stability. However, at its November meeting, the central bank refrained from implementing another increase in tandem with the Fed.

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“Local economic conditions simply do not justify further tightening measures at this juncture,” said an HKMA spokesperson last week. “There are signs of a meaningful slowdown in activity, so we believe keeping rates on hold is prudent for now.”

By declining to match the Fed’s latest 0.75% rate hike, the HKMA is signaling that it wants to avoid further hampering growth prospects. This shift is being applauded by investors, as it reduces pressure on Hong Kong stocks, especially for rate-sensitive sectors.

Bargain Hunting Among Oversold Stocks

Beyond the changing macro backdrop, deal-hungry investors are also returning simply because valuations for Hong Kong stocks now look too attractive to ignore. The Hang Seng’s precipitous plunge, which sliced nearly 30% off the index in 2022, has left many stocks looking extremely oversold.

Legendary investor Warren Buffet’s oft-quoted advice to “be greedy when others are fearful” likely resonates with many valeur-focused money managers surveying the Hong Kong equity landscape lately. With high quality companies trading at just 6 to 8 times earnings in some cases, the sheer bargain appeal seems irresistible.

Take Hong Kong property developer Sun Hung Kai Properties as an example. The stock has sunk over 60% from its 2021 peak, pushing its P/E multiple below 4x recently. Yet the company still generates plenty of free cash flow, pays a juicy dividend yield above 8%, and sits on a valuable portfolio of investment properties across Hong Kong and China.

“Investors are capitalizing on mispriced stocks whose fundamentals do not justify such huge discounts,” explained Rachel Lau, senior portfolio manager at Grandeur Peak Global. “The excessive pessimism has created pockets of opportunity that we are selectively taking advantage of.”

Looking Ahead

While risks still abound, from China’s uncertain COVID exit strategy to Hong Kong’s weakening economy, the recent revival of bullish spirits seems warranted given excessive negativity surrounding the market before. However, volatility will remain par for the course, so steel nerves will be required.

“The coast is definitely not yet clear – I expect continued turbulence ahead,” cautioned Mr. Chen. But for investors with long-term horizons, the Hong Kong stock recovery could have more room to run if the macro environment keeps improving.

After languishing in value territory for nearly two years now, blue-chip Hong Kong stocks may finally be stirring from their nightmare slumber as bulls return. While more volatility likely lies ahead, the light at the end of the tunnel seems to be growing brighter. Patient, discerning investors could be handsomely rewarded for venturing back in.

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