Winter’s over and Hong Kong stocks are springing back to life

It’s no secret that Hong Kong equities have endured a painful period. The high expectations for economic growth after Hong Kong lifted Covid-19 restrictions in late 2022 didn’t materialise, while the slowdown in China’s property market and stubborn global inflation further undermined support.

There hasn’t been much good news on Hong Kong stocks to write about, but I think the market has finally woken up after what feels like a multi-year winter.

Since reaching a trough in January, the Hang Seng Index is up by nearly a quarter, the H-shares index – for mainland companies listed in Hong Kong – has risen by about 30 per cent and MSCI China is up by nearly 20 per cent in US dollar terms.

Recent economic indicators are encouraging. First-quarter growth was better than expected, and tourist arrivals over the Labour Day “golden week” holiday show the city is still appealing.

The economic environment in China and the United States is also supportive. The recent Federal Open Market Committee meeting underscored the US central bank’s continued easing bias, and there was positive news from Beijing’s Politburo meeting for further stimulus and regulatory support for the offshore market.

There also appears to be a rotation out of popular but crowded investment themes such as artificial intelligence, Taiwan, Japan and the US markets into better-value propositions and cheaper stocks.



Apple supplier Foxconn to build ‘AI factories’ using US hardware leader Nvidia’s chips and software

Apple supplier Foxconn to build ‘AI factories’ using US hardware leader Nvidia’s chips and software

It makes sense that Hong Kong stocks are finally getting the attention they deserve. Even after the year-to-date rally, H-shares continue to trade at an over 40 per cent discount to their A-share peers.

Last month, the China Securities Regulatory Commission announced a raft of supportive policies including an expansion of the Stock Connect scheme. This should drive more mainland capital into Hong Kong’s stock market and help close the valuation gap.

The announcement followed interventions by the “national team” to buy H-shares via the Stock Connect scheme and official encouragement of mainland companies to list on the Hong Kong exchange. This is why Southbound Connect flows have averaged 37 billion yuan (US$5.1 billion) daily over the past month, up meaningfully from 25-30 billion yuan over the past 12 months.

It’s true there have been episodes of strong southbound buying that proved fleeting, such as in early 2021 when some mutual funds pitched an H-share/A-share convergence investment strategy. Today, I think the rally will be driven not by this type of tactical near-term liquidity boost, but by the bigger questions on whether China’s economy can continue to accelerate and whether foreign investors, long on the sidelines, could step back in.



Hong Kong finance chief rules out capital gains tax for ‘foreseeable future’ for city

Hong Kong finance chief rules out capital gains tax for ‘foreseeable future’ for city

Foreign investors recognise that the Hong Kong market is uniquely affected by geopolitics and US-China relations. With so many geopolitical issues unresolved, international capital flows to Hong Kong could remain tactical, especially as the outcome of the US presidential election remains uncertain.

Our analysis has shown that politics is, more often than not, “noise” when it comes to making investment decisions. Fundamentally, I’m much more optimistic that Chinese growth can bolster the market in the longer term and convince domestic and international capital to pivot from a tactical to a more longer-term allocation. A sustained drumbeat of recent positive indicators including gross domestic product, purchasing managers’ index and export figures have been encouraging.

The procurement director of an Indonesian company learns about a potential suppliers’ products during the China Import and Export Fair in Guangzhou on April 16. Xinhua: Liu Dawei

The next major catalyst for Hong Kong stocks will come from consumer indicators, and here we may have some good news. Preliminary consumer data on Chinese travel over the “golden week” holiday shows robustness: international flight booking volumes hit a post-Covid record and intercity mobility has surged. According to the National Bureau of Statistics, the March consumer confidence index has shot up to a one-year high.

The stabilisation of China’s property market will also be a major boost for investor sentiment. At the latest Politburo meeting, policymakers indicated they intend to roll out more measures to reduce inventory and support sales. The market will be carefully watching for tangible results, although this is likely to be among the last segments of the economy to stabilise.

We are seeing what are arguably the first green shoots of re-accelerating growth in mainland China and Hong Kong. Economic growth in both markets is exceeding expectations and global growth appears to be re-accelerating, even in the euro zone. We are still far from the levels seen in Hong Kong’s equity heyday, but the path has not been this clear for years.

David Chao is a global market strategist, Asia-Pacific (ex-Japan), at Invesco



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