Hong Kong’s stock market is currently experiencing a remarkable upswing following months of stagnant performance and losses worth trillions of dollars in previous years due to global investors’ growing skepticism concerning China’s economy, worsening tensions with the US and slowdown forecasts. However, recent events have brought about an encouraging turnaround for Hong Kong stocks that started earlier this year, driven by multiple factors which seem destined to make their comeback after a dismal 2023 performance in both regional and global markets.
The Hang Seng Index has witnessed impressive growth of over seven percent during April alone making it the top performer among major international stock exchanges around the globe, surpassing its previous lowest point reached earlier this year by nearly twenty per cent (see Figure 1). This upturn is a significant improvement from Hong Kong’s weak start to 2024 and years of substantial losses that wiped out more than USD$3 trillion from investors in these exchanges over time, further impacting an overall fallback due mainly to sceptical beliefs around the prospects for China’s economic future.
Figure 1: Hang Seng Index (Source: Google Finance)
The recent surge is a result of several factors that have combined to revive Hong Kong stocks in light of improving economic conditions, cheaper valuations and foreign inflows returning due to an economy stabilizing in China after months of uncertainty surrounding the country’s future. Kelly Chung, Chief Investment Officer for Multi Assets at Value Partners stated, “Foreign investments are beginning to come back with the bottoming out of the [Chinese] Economy”. This improvement can also be attributed partly due to Chinese economic data that has turned more positive in recent times (see Figure 2).
Figure 2: China’s Manufacturing PMI Index (Source: TradingEconomics)
Zhikai Chen, Head of Asian Equities at BNP Paribas Asset Management further added that the valuation gap between Hong Kong stocks and other regional markets has become more compelling after last year’s significant price correction. He also noted a shift in investor sentiment as Chinese economic data improves (see Figure 3).
Figure 3: China’s GDP Growth Rate (% Year-on-Year) from Jan.-2016 to Q1 – 2024 (Source: TradingEconomics)
In recent weeks, analyst reports that suggest a more tangible and proactive resolution being drafted for the current crisis within China’s real estate industry has had investors particularly enthusiastic. The country’s property sector is considered crucial to its economic stability; thus, attention regarding it in today’s world events holds utmost significance (see Figure 4).
Figure 4: New Home Prices Index (% Year-on-Year) from Jan.-2016 to Mar.-2024 (Source: TradingEconomics)
The recent policy measures, including lifting restrictions on homebuyers and providing support for developers’ funding needs, have been seen as a testament of the Chinese government’s commitment towards stabilizing this critical sector in 2024. Stephen Innes, Managing Partner at SPI Asset Management stated that “Recent policy measures ranging from lifting restrictions on homebuyers to providing support for developers’ funding requirements underscores China’s governmental determination and steadfastness”.
Furthermore, Chinese equities listed in Hong Kong are becoming increasingly attractive compared with Indian markets which have been booming due to robust economic growth. Angelina Lai, Chief Investment Officer at St James’ Place, reported that investors had started viewing India as overvalued since outflows from the country were observed and transferred into China (see Figure 5).
Figure 5: MSCI Emerging Markets Index – Price Performance in USD ($) from Jan.-2016 to Apr. – 2024 (Source: Google Finance)
Innes also noted that global investors might find the market rallies for China too captivating considering a lack of growth elsewhere and given Hong Kong stocks’ compelling valuation relative to US counterparts, which could lead to further momentum in this upward trajectory. However, geopolitical tensions remain a concern due to growing apprehension about potential fallout from the upcoming US elections (see Figure 6).
Figure 6: China-US Trade Balance ($ Billions) from Jan.-2015 to Mar.-2024 (Source: TradingEconomics)
Despite these concerns, Hong Kong has witnessed strong inflows of money coming in from mainland China where investors are worried about further depreciation of the Chinese currency and assets. The yuan’s value against the US dollar dropped by around four percent during the previous year (see Figure 7). St James’ Place Chief Investment Officer, Angelina Lai also reported that while macroeconomic data in China might be less than inspiring currently, this trend is still preferable to Hong Kong stocks due to steep price drops seen last year.
Can you provide more information on the factors contributing to the recent surge of Hong Kong’s stock market? Also, can you suggest any potential risks that may hinder its further growth in the near future based on current developments and analyst opinions discussed in this article?
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