Market Outlook

Hong Kong stocks: will the Hang Seng pick up?

A number of analysts expect Hong Kong’s Hang Seng index to get a significant lift by the end of December, despite the ongoing protests that have pushed the territory into trade tensions and a predicted slowdown in the property industry, according to a Bloomberg survey.

The analysts noted attractive stock valuations, a temporary easing of US-China trade tensions, and stimulus measures from Beijing as key factors that could help push Hong Kong’s Hang Seng higher by the end of the year. In terms of seasonal data to support that prediction, since 1989, Hong Kong stocks have risen by an average of 5.9% in the final three months of the calendar year, Bloomberg notes.

Such a boost for the Hang Seng would be welcomed, as the index has lost more than $400bn since the end of June and has had some of the world’s worst stock returns this quarter.

 

 

 

What has been troubling the index?

It’s been a painful few months for Hong Kong’s Hang Seng index, which analysts say is having its worst performance since China’s stock bubble burst in 2015.

Like much of Asia, the index has been grappling with the US-China trade discussions, which this year have been subject to fits and starts.

But what has been much more visible are the anti-government demonstrations in Hong Kong, which started with small rallies in March, and transformed into mass protests by June. The unrest has raised concerns not only about the effects of long-term civil unrest in the region, but also as to how China could respond to events. The Hang Seng index has fallen by over 11% from its year-to-date high of 30,280 in mid-April.

11%

Amount the Hang Seng Index has fallen year-to-date

 

As a result, in the third quarter of 2019, Hong Kong’s hedge funds have seen their biggest outflows since the global financial crisis. Traders took out a net $1bn from the city’s hedge funds – the most outflows since early 2009.

 

Hong Kong stocks are undervalued

In the past couple of months, many analysts have suggested that now is the best time to buy Hong Kong stocks. For example, Swiss private bank Julius Baer notes that “times of crisis”, such as with the civil unrest in Hong Kong, are usually a good opportunity to invest in the region’s stocks.

Hong Kong equities are a buy,” Yves Bonzon, chief investment officer at Julius Baer, told Bloomberg. “You can see from the Hong Kong market valuation that the appetite for equities at the moment is very low, which creates a unique entry point.”

Buying dips in the Hong Kong market during times of stress have historically proven to be profitable, according to The Financial Times. In the 13 months following the Asian financial crisis in the late 1990s, for example, the Hang Seng surged by about 170%, excluding dividends. In the seven months after the deadly outbreak of severe acute respiratory syndrome (SARS) was halted in 2003, the index rallied by nearly 70%.

Peter Kennan, managing partner at Black Crane Capital, told the newspaper: “Buying in Hong Kong now has to be a good long-term bet.” He also noted that the Hang Seng is trading just over 10 times trailing earnings – about half the level of the S&P 500 and MSCI World indices.

Gary Ching, vice-president of research at Guosen Securities, told Bloomberg that stocks are “seriously undervalued” at a time when dovish central banks worldwide are boosting sentiment, rendering them a good buy.

“Buying in Hong Kong now has to be a good long-term bet” - Black Crane Capital managing partner Peter Kennan

 

How key stocks are performing

Anheuser-Busch InBev

Hong Kong’s market for initial public offerings is making a comeback, having led the world in market debuts since the start of September. The total value of first-time share sales on the city’s stock exchange since 1 September is HK$7.9bn, overshadowing the Nasdaq and New York Stock Exchange. A large part of this success is down to Anheuser-Busch InBev’s [ABI] recent HK$5.8bn IPO of its Asian unit, which has done much to improve sentiment in the Hong Kong market.

 

 

Geely Automobile

The automotive company, Geely [GELYF], is making a comeback this autumn, after taking a knocking for the majority of the year. Although it is currently trading over 20% off its year-to-date high of HK$19.14, it has climbed by close to 25% since the start of September.

 

 

Tencent

Hong Kong-listed internet company Tencent [TCEHY] has lost over 14% since the end of June, when mass protests started, and is trading about 20% off its year-to-date high of HK$400.40 in April. It closed at HK$317 on 29 October. The media giant may have room to move when it reports its third-quarter earnings on 13 November.

 

 

What next?

In spite of some analysts’ positive outlook, many others are still cautious about Hong Kong’s near-term fate.

The city’s financial secretary noted this weekend that he will not rule out that Hong Kong may report negative growth this year as a result of the unrest.

Earlier this month, Hong Kong’s chief executive, Carrie Lam, said the protests’ “blow to our economy is comprehensive” because of a drop in tourism. The government is due to release its estimate for third-quarter growth on 31 October.

Furthermore, pessimism exists about whether the region can prosper while the unrest persists. Earlier this month, S&P Global Ratings warned that residential property prices may fall by 10-20% by the end of 2020 as a result of the protests. On 9 October, Morgan Stanley [MS] cut its outlook for the region’s banking sector, lowering its recommendation to “cautious” from “in line”.

 

  AB Inbev Geely Auto Tencent
Market cap €142.016bn $17.374bn $383.374bn
PE ratio (TTM) 15.37 8.83 29.63
EPS (TTM) 4.72 0.2140 1.36
Quarterly Revenue Growth (YoY) -0.80% -11.50% 20.60%

AB Inbev, Geely Auto & Tencent share price vitals, Yahoo Finance, 30 October 2019

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