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Brexit

Hong Kong’s already hard-hit retailers to feel Brexit bruises

Tourist numbers to fall, outbound travel to grow as dollar strengthens and yuan weakens, meaning less spending here.

PUBLISHED : Tuesday, 28 June, 2016, 3:22pm
UPDATED : Tuesday, 28 June, 2016, 4:25pm

Hong Kong’s already struggling retail sector may be hit further as a result of Britain’s vote to leave the EU, according to analysts.

Experts now say they expect tourist numbers to decline and outbound travel to grow on the back of a stronger US dollar and weaker Chinese yuan, meaning less spending here.

Hong Kong retail sales have hit a wall since tourist numbers from the mainland started declining sharply a year ago.

But analysts say the worst may not be over, after the shock decision by Britain triggered global risk aversion, and will continue to push higher the value of US dollar.

“The retail downturn is going to continue,” Morgan Stanley said in its latest snapshot of global reaction to the Brexit, noting Hong Kong’s outbound travel is already growing due to the stronger local currency, which is pegged to the US dollar.

Chinese tourists are also likely to travel elsewhere or spend less in Hong Kong, as the yuan weakens, it said.

On Monday, a Hong Kong government report showed retail sales slumped 12.5 per cent year-on-year in the first quarter to HK$115.2 billion, from HK$131.6 billion in the same period last year.

The total number of retail establishments also dropped sharply to 64,498, fewer by 1,400 from the first quarter last year. And there have been 10,000 retail sector job losses in the past year, with the number of employees also down to 320,400 by the end of first quarter.

Sa Sa, Hong Kong’s largest cosmetics retailer, reported last week it had suffered a 54 per cent decline in profits in the past 12 months to approximately HK$384 million, way less that market expectations.

Its annual sales also declined 13 per cent to HK$7.85 billion, as mainland tourist numbers dropped rapidly on the back of a stronger Hong Kong dollar and weaker Chinese yuan.

“The worst may not be over (for the company’s performance),” warned Sa Sa’s chairman Simon Kwok after the earnings release.

HSBC analysts have just given a ‘reduce’ rating to Sa Sa shares and slashed the firm’s earnings estimates for the next fiscal year by about a fifth.

In its latest note, the Morgan Stanley analysts say demand, too, for commercial property is likely to be impacted by weaker Hong Kong economic growth and the sluggish labour market.

“Discretionary retail mall operators like Wharf and Hysan could continue to suffer,” they added.

That sentiment is echoed by analysts at Nomura, Japan’s leading investment bank, who say Hong Kong’s economy could be hit the hardest in Asia by the Brexit, given its status as a financial hub and its currency peg.

Nomura recently slashed its growth forecast for Hong Kong this year to minus 0.2 per cent, from a previous 0.8 per cent — the biggest percentage-point cut in among all Asian economies excluding Japan.

A stronger HK dollar is likely to have a negative impact on Hong Kong’s tourism and retail sales
Analyst report from Nomura

“We now forecast an outright recession in Hong Kong this year, and there is a risk that large net capital outflows, through the workings of the currency board system, will cause Hong Kong interbank rates to spike, deepening the recession and setting off a vicious spiral,” they said.

The Hong Kong dollar, meanwhile, which is pegged to the greenback, is expected to appreciate significantly after the Brexit.

“A stronger HK dollar is likely to have a negative impact on Hong Kong’s tourism and retail sales, especially if it means a weaker RMB,” Nomura analysts said.

Investor confidence may be shaken further, they added, amid uncertainty over global financial markets, with financial transaction volumes expected to fall significantly which they called another major negative for the city’s financial sector.

“We are particularly concerned about an-already fragile Hong Kong property market,” they added.

The only bright spots in the overall retail market gloom, however, were recommendations from Bank of America Merrill Lynch and China International Capital Corp to invest in Hong Kong jewellery makers, which they said should benefit from the rising price of gold, amid global risk aversion fuelled by the Brexit.

Both maintained ‘buy’ ratings recently for Luk Fook Holdings, a Hong Kong gold-jewellery retailer.

“Luk Fook would be the biggest beneficiary from the recent upward trend in the gold price due to its smallest hedging ratio of 15 per cent to 20 per cent,” BoA Merrill Lynch analysts said.