New | HK stocks sell-off hits sixth day as China downgraded
Hang Seng Index down 1.27pc and turnover 20 per cent below April's average as investors wait for direction after downgrade of China equities
The Hong Kong market sell-off continued into a sixth day as investors took profits and waited for direction after a major Wall Street bank downgraded Chinese equities for the first time in seven years.
Thursday's sell-off came on the back of a meltdown on concern over valuations. US stocks dropped up to 1 per cent on Wednesday after Federal Reserve chief Janet Yellen said equity valuations were "quite high".
The Hang Seng Index fell 1.27 per cent, or 350.94 points, to 27,289.97. Turnover was HK$161.6 billion, about 20 per cent lower than last month's daily average, suggesting some investors are standing on the sidelines.
The Shanghai Composite Index fell 2.77 per cent, or 117.05 points, to 4,112.21, down 9.3 per cent from last month's high.
"It's a healthy correction. The market just takes a breather," said Ben Kwong Man-bun, a director of KGI Asia.
There was no negative news that could trigger a large fall at the moment, Kwong said.
Mainland China's main index has risen about 110 per cent since last summer, driving up company valuations and prompting regulators to warn the market's predominately retail investor base against borrowing money to trade stocks.
The CSI300 index, which tracks the country's largest firms, traded at a price-earnings ratio of 18.7 times, said Gerry Alfonso, an analyst at securities firm Shenwan Hongyuan. Compare it to the Hang Seng Index, which trades at 11.6 times, and "it is easy to conclude that … the discrepancy in valuation is just too high", he said.
Morgan Stanley went a step further on Thursday by downgrading MSCI China, which invests in larger mainland companies listed in Hong Kong, to "equal-weight", from "overweight", the first downgrade of the index since November 2008.
"Dramatic recent outperformance has led to a deterioration in absolute and relative valuations and a technically overbought situation," wrote Morgan Stanley strategists.
Financial sector stocks were among the biggest losers by volume in Hong Kong. China Taiping Insurance dropped 3.08 per cent to HK$28.30 after the company announced a placement equal to 15.64 per cent of its existing share capital.
The H-share index slid 1.64 per cent, or 228.88 points, to 13,768.4, its lowest close in almost a month.
In Shanghai, nearly 70 per cent of the composite index members fell. The hardest hit were power companies.
Trading volume was 394 billion yuan, 35 per cent below its one-month trading average. One reason for the sluggish turnover is that an estimated 2.5 trillion yuan is locked into 24 listings coming on market this week.
Including loans from brokers, banks and various trust and repo products, 4.4 trillion yuan to 5.9 trillion yuan of borrowed money, equivalent to between 6 and 9 per cent of total capitalisation, was swishing around the mainland's stock markets now, Credit Suisse said in a report.
Ignoring regulatory warnings, a 106 basis point jump for overnight loans in Shanghai on Wednesday showed investors are still hungry to borrow.
