Outlook ‘significantly brighter’ for Hong Kong stocks, as US$5 trillion market attracts global investors rotating out of US, Japanese shares

Demand for adding back Chinese assets has been rising amid the rebalancing of global assets, HSBC Jintrust strategist says
‘Outlook appears significantly brighter now compared to just a few weeks ago, offering hope for a more robust economic recovery’: SPI Asset Management’s Stephen Innes

Hong Kong stock market

Zhang Shidongin Shanghai

Published: 3:10pm, 30 Apr 2024

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Hong Kong stocks are back in favour among global investors, emerging as the best-performing key market globally in April, after funds sought bargains by shifting out of expensive US and Japanese equities and as China’s growth shows more signs of stabilising.

The Hang Seng Index, the 82-member benchmark tracking the city’s US$5 trillion stock market, has risen 7.4 per cent over the past month, beating all other major equity gauges in the world. At one point, it rose 20 per cent from a January low, gains seen by technical traders as entering a bull market.

The turnaround suggests that overseas investors have regained their appetite for Chinese assets, which were being dumped until recently due to scepticism about the growth outlook for the world’s second-largest economy. Hong Kong’s stock market stands out with its depressed valuations, offering safe bets for investors that seek to diversify their portfolios after sizeable gains in markets in the United States, Japan and India.

China’s improving economic data has also dispelled jitters about a slowdown in expansion at least tentatively.

“When it comes to valuations, Hong Kong’s market is among the lowest globally and that boosts the appeal of investment values,” said Shen Chao, a strategist at HSBC Jintrust Fund Management in Shanghai. “Demand for adding back Chinese assets has been rising amid the rebalancing of global assets. Expectations have also improved after a stabilisation in growth and a raft of measures to support the market.”

Even after the gains, the Hang Seng Index is valued at 6.3 times realised earnings, the lowest in the world, according to Bloomberg data. That compares with a multiple of 24 times for the S&P 500 index and 26 times for Japan’s Nikkei 225, the data shows. The Hang Seng gauge is currently almost halved after a record run of four annual declines from a peak set in 2018.

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Elevated valuations reduce the appeal of US and Japanese stocks in particular, and make them vulnerable to any negative news headlines at a time when the Federal Reserve might hold interest rates high for longer to cool sticky inflation.

Sentiment around Hong Kong stocks has also taken a turn for the better after more signs have surfaced that China’s growth has gathered pace and earnings might have bottomed out. An official report on Tuesday showed that the manufacturing industry expanded for a second month in April, while results from the likes of Hong Kong Exchanges and Clearing and China Life Insurance exceeded consensus estimates.

Regulatory support is also adding to the upbeat mood. The China Securities Regulatory Commission, which oversees the onshore stock market, this month mapped out a five-point document aimed at propping up Hong Kong’s market, running the gamut from adding more exchange-traded funds to the cross-border Stock Connect programmes to encouraging listings of Chinese high-calibre companies in the financial hub.

Hong Kong stock index closes near bull market territory on earnings optimism

“At least for the short term, the momentum in Hong Kong stocks has more legs, driven by multiple positive factors,” said Xue Wei, an analyst at Topsperity Securities.

UBS Group upgraded the ratings for both Hong Kong and Chinese stocks to overweight this month, citing resilient earnings for big companies, while HSBC Holdings said that Asian funds boosted holdings of Chinese stocks to a seven-month high.

For Stephen Innes, the managing director at SPI Asset Management in Bangkok, the fear of missing out on a rally among global investors will help Hong Kong stocks to hold up, given their valuation edge over other markets.

“This could lead to a global shift of funds into Chinese equities, potentially sustaining the current upwards momentum,” he said.

“In summary, the outlook appears significantly brighter now compared to just a few weeks ago, offering hope for a more robust economic recovery.”