Hong Kong Stock Exchange

Hong Kong stocks unlikely to return to glory days of a year ago

Analysts cite slowing Chinese economic growth and concern about a weakening yuan currency

PUBLISHED : Friday, 08 April, 2016, 7:32pm
UPDATED : Friday, 08 April, 2016, 11:17pm

Last April 9 turnover on Hong Kong’s market rose to a record HK$293.9 billion. The monthly average reached HK$200 billion.

Almost a year later, that shrank to HK$72 billion, according to data from Hong Kong Exchanges and Clearing.

Analysts said it’s unlikely the markets will return to their glory days anytime soon.

“A lot of things have changed,” Ivan Li, an equities analyst at Tung Shing Securities, said. He cited a “quite weak” Chinese economy, concerns over a devaluation of that country’s yuan currency and a plunge in Chinese stock prices earlier in 2016. The fall was so steep that market circuit breakers kicked in to halt trade.

China’s stock market index has tumbled from a seven-year high of 28,588.52 on April 27. Such levels were only seen before the 2008 financial crisis, sparked when US investment bank Lehman Brothers collapsed. The index closed at 20,370.40 on Friday.

The rally started in March 2015 when Beijing allowed China’s then five trillion yuan mutual fund industry to enter the Hong Kong stock market via the Shanghai-Hong Kong stock connect. That opened the door to huge capital inflows.

The two-way scheme — launched in November 2014 — had only previously allowed retail investors on the mainland to buy Hong Kong shares and international investors to purchase yuan-denominated A-shares on the mainland.

As the cross-border market gained traction, the valuation gap between mainland-listed A shares and H shares, the Hong Kong-listed stocks of mainland companies, widened. That drove mainland investors to seek a discount in Hong Kong against companies’ A-share counterparts.

For the first time since the scheme was launched, southbound traffic April overtook northbound investment into Shanghai. The Chinese city had always previously dominated traffic via the link.

Hong Kong investors, riding on speculation that more money was going to flow in from the mainland, sent share prices rocketing, analysts said.

But it didn’t last long — weak Chinese economic data, China’s currency devaluation and government intervention in the stock markets was where it began to go downhill and has continued at low levels this year, analysts said.

Shares of bankers and insurers have fallen over the year. The Industrial and Commercial Bank of China lost half its value to trade at HK$4.11 a share. Hong Kong-traded stock in HSBC and Ping An declined 48 per cent and 40 per cent respectively. That compares with a 29 per cent drop for the market overall.

Li at Tung Shing Securities said that banks, as heavyweight traders in the Hong Kong stock market, still struggle to deal with a global debt problem.

People don’t have “much confidence in the bank’s prospects,” he said. “Regulations have tightened and there is weak demand for loans.”

Kenny Tang Sing-hing, CEO at Jun Yang Securities, said a downturn in the global economy also played a role.

Most investors are still “quite conservative” and have concerns about overseas markets, he said. “You can see the US market and oil price is not quite stable.”

He cited recent gains in the yen, and said it showed investors are treating the Japanese currency as a safe haven and investors’ weakened appetite for risk.

Both Li and Tang said they don’t see the Hong Kong stock market returning to its prime this year. They highlighted China’s economic growth that slowed to a 25-year low in 2015.

Tang said the launch of the Shenzhen-Hong Kong stock connect, along with more Chinese monetary policies to stimulate the economy, would give upward momentum to Hong Kong stocks.

“Last year, the Hang Seng Index tested around 28,000,” Li of Tung Shing Securities said. “It’s not a ridiculous valuation. If China’s economy stabilises, we can revisit that level in a few years later. This year, it’s highly unlikely.”