Hong Kong stocks have experienced a resurgence. Villagers explain the reasons.
In recent months, the Hong Kong stock market has experienced a sharp rebound, marking a significant turnaround from a weak start to 2024 and years of heavy losses. This upturn comes after global investors became increasingly skeptical about China's economic future and concerned about geopolitical tensions with the United States. The value of the city's stock market had dropped by more than $3 trillion due to these concerns.
The improving economic landscape in China, combined with cheaper valuations and a surge of mainland investors putting money into Hong Kong to protect their portfolios from a weakening Chinese currency, have contributed to this resurgence.
Kelly Chung, the chief investment officer for multi assets at Value Partners, a Hong Kong-based asset management firm, stated, "Foreign inflows have started to come back with the bottoming of the [Chinese] economy."
Zhikai Chen, the head of Asian equities at BNP Paribas Asset Management, suggested that the valuation of Hong Kong stocks is now more "compelling" in comparison to other regions in Asia. Additionally, he observed a shift in investors' sentiments as Chinese economic data has shown signs of improvement.
In recent days, investors have become more optimistic due to reports that Beijing plans to introduce a "real solution" to address the crisis plaguing the property sector. This sector is crucial for China's economic stability.
Stephen Innes, the managing partner at SPI Asset Management, elaborated on this, stating, "Attention is squarely on China’s property market, seen as the linchpin of the country’s economic stability."
Beijing's recent efforts to support the struggling property market, including relaxing restrictions on homebuyers and providing funding for developers, demonstrate the government's commitment to bolstering this sector in 2024.
Economic Recovery
There are indicators suggesting that China's economy may be starting to recover. Manufacturing activity experienced its fastest growth in 14 months in April, as per a private survey. The Caixin/S&P Global manufacturing PMI rose to 51.4 in April from 51.1 in March, indicating the sixth consecutive month of expansion and an increase in new export orders due to improved global demand. In the first quarter, China's GDP increased by 5.3% year-on-year, mainly driven by high-tech manufacturing.
David Chao, the global market strategist at Invesco, remarked that these PMIs appear to suggest improving momentum since the start of the year. He continued, "Heading into the middle of the year, the recent PMIs are in much better territory compared to a year ago, and I think this is due to fiscal and monetary stimulus taking effect in the economy."
Near the beginning of this month, Caixin reported that Beijing is exploring the idea of launching a national platform to acquire unfinished housing projects throughout the country. These projects would then be turned into affordable housing and the units would be sold or rented out.
Nomura analysts commented on this, stating, "The Caixin report suggests Beijing is edging closer to a real solution for the property sector."
Cheap Valuations
Chinese equities listed in Hong Kong are beginning to appear more attractive, particularly when compared to Indian markets, which have been thriving due to strong economic growth.
Angelina Lai, the chief investment officer at St James's Place, noted in her quarterly market update earlier this month, "We are observing investors starting to view India’s valuation as ‘expensive,’ and outflows have been witnessed from India to China [equities]."
Innes added, "Although the macro picture in China is unpromising, the sharp decline of Chinese equities has pushed the local equity risk premium above the trend."
The fear of missing out (FOMO) often occurs during market surges, and this is where Chinese equities are concerned. Global investors are currently underweight in Chinese markets, including Hong Kong, due to geopolitical tensions and concerns about potential consequences from the upcoming US elections. However, the attractive valuation of Chinese stocks in comparison to their US counterparts could trigger global rotations of funds into Chinese equities, theoretically sustaining the market's upward trajectory.
Diversifying from a weakening yuan
Hong Kong has also experienced strong inflows of money from mainland China, where investors are worried about the further depreciation of the yuan and mainland assets. The yuan has lost 4% of its value against the US dollar in the past year.
While other major central banks have maintained tight monetary policies to combat inflation, the People's Bank of China has reduced rates several times and promised to maintain extensive liquidity this year to counteract deflation. In March and the first three weeks of April, southbound investors (meaning investment from mainland China into Hong Kong) purchased nearly $20 billion worth of Hong Kong-listed stocks on a net basis.
BNP Paribas analysts claimed, "We believe southbound investors could be using HK-listed equities to diversify their currency exposure in light of rising RMB depreciation pressure resulting from US-China interest rate differentials."
According to them, Chinese investors from the mainland tend to spread their investments to assets not in RMB (like Hong Kong-listed shares and commodities) when the RMB depreciates. They also mentioned that the depreciation pressure on the yuan may persist until the end of this year.
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Source: edition.cnn.com
