Hong Kong stocks will resume their rally soon as Beijing support lifts sentiment: analysts

A potential rate cut and more supportive measures expected to emerge from Beijing’s third plenum could all give the Hong Kong market the impetus it needs, say analysts and money managers

Hong Kong stock market

Eric JiangandJiaxing Li

Published: 6:00am, 21 Jun 2024

Why you can trust SCMP

Hong Kong stocks could enjoy a better second half to the year following their recent decline, as global interest rates start to come down and more supportive measures in China provide a boost, analysts and money managers say.

A potential rate cut from the US Federal Reserve as early as the third quarter and more confidence-lifting measures expected to emerge from Beijing’s third plenum in July could all give the Hong Kong market the impetus it needs to resume the rally it achieved in the first five months of 2024, they said.

“The recent correction has opened up room for more structural opportunities,” Kevin Liu, equity strategist and managing director at CICC Research, said during a media briefing on Thursday in Hong Kong.

Risk appetite has been returning, and selling by foreign investors has passed its peak, which bodes well for the market, he said.

The Hang Seng Index, which surged as much as 31 per cent through May from a January low in a US$1.2 trillion bull run, has been struggling to find direction in recent weeks as the stimulus-powered upturn lost steam. The city’s benchmark index has fallen back 6.6 per cent after hitting a high on May 20, narrowing its first-half gain to 7.5 per cent, according to Bloomberg data.

05:39

Hong Kong stock market falls below 15,000 level, its lowest in 15 months

“The market is now looking for more catalysts, and is well positioned to climb higher” should the tailwinds come through, said Liu.

The optimistic outlook from CICC follows a change of heart by Societe Generale, which has turned positive on China for the first time since December 2022 as cheap valuations, hopes of policy support and earnings improvement lifted the French bank’s confidence.

“Hong Kong and China are really cheap,” Frank Benzimra, head of Asia equity strategy and multi-asset strategist at the bank, said at a media briefing on Wednesday. “That means the market has a more favourable risk-reward.”

Meanwhile, the buying of Hong Kong exchange-traded funds (ETFs) by Chinese state-run funds known as the national team this week have reinforced bets that policy support will only grow more forceful to protect the downside, according to KGI Asia.

“I’m quite excited about the third plenum next month,” Kenny Wen, head of investment strategy at KGI Asia, said in a separate media briefing on Thursday. The key policy meeting will chart the path for China’s economy for the next five years, and Beijing is likely to stay accommodative to continue restoring confidence and sustaining the momentum of the economic recovery, he added.

Southbound investors, encouraged by the national team’s buying, could also speed up their purchases of Hong Kong-listed shares in pursuit of yield, providing additional support, said Wen.

To be sure, there is a risk that Beijing’s stimulus measures could fall short of market expectations as the authorities want to reduce the economy’s reliance on credit, Arthur Budaghyan, chief strategist for emerging markets and China at BCA Research, said in a note to clients on Wednesday.

Furthermore, the property crisis is putting off money managers like LGT, which said the stabilisation of the troubled market is “a necessary first condition” of becoming more positive about China equities.

“Volatility will increase a lot as we go into July and August because we get closer to the US elections,” said Stefan Hofer, managing director and chief investment strategist at LGT.

While risks remain, the potential for a more favourable policy environment and attractive valuations could provide a solid foundation for a significant rebound in Hong Kong stocks, according to KGI’s Wen.

“We anticipate that in the second half of 2024, the Hong Kong market may better reflect the positive factors,” he said.