Bored investors wait for something to happen to Hong Kong's lacklustre market

'You could close the Hong Kong market and no one would notice,' says one investor

PUBLISHED : Monday, 03 March, 2014, 2:59am
UPDATED : Monday, 03 March, 2014, 8:51am

The Hang Seng Index is locked in a tight 2,000-point trading range, creating apathy about Hong Kong equities.

"February has gone incredibly flat incredibly quickly, and [the Hang Seng Index] is extremely range-bound," said Andy Maynard, a global head of trading and execution at CLSA. "My clients are sitting on their hands … we are in a state of real boredom."

Another brokerage executive said: "You could close the Hong Kong market and no one would notice."

Since the beginning of last year, the Hang Seng Index has closed between the 21,500 and 23,500-point levels 79 per cent of the time.

The lacklustre performance is at odds with global markets. Share prices in Japan, Europe and the United States have been buoyant lately, and certainly more dynamic than Hong Kong equities. The S&P 500 Index of US stocks hit a record last week and the technology-heavy Nasdaq touched a 14-year high.

Mainland China is often cited as the root cause of Hong Kong's flatness. Mainland stocks account for just over half the weighting of the Hang Seng Index, and investors have been struggling to get a read on the mainland market in the context of slowing economic growth and, conceivably, a brewing banking crisis.

Steven Sun, the head of China equity strategy at HSBC, said there was more than 10 trillion yuan (HK$12.6 trillion) in bonds and trust instruments maturing in the mainland market this year.

This is placing huge demand on credit supply just as regulators are tightening liquidity. This has already led to higher credit costs, reflected in rising bond yields, which is contributing to the slowdown in the mainland economy.

The larger fear is that a string of defaults will scare investors out of debt markets entirely, shutting down credit supply in the bond and trust markets, triggering more defaults and a full-blown crisis.

Chinese equities also have their supporters who note that the price-earnings ratio for the H-share index is 46 per cent below its 10-year average. They say that even if mainland economic growth were to slip to 5 per cent, it would still be exceptional.

"The pressures are really showing up on the [purchasing managers' index] and now we have news of cuts in property prices," said Erwin Sanft, the head of China and Hong Kong equity research at Standard Chartered. "But by the middle of the year, we expect to see obvious signs of deflation, and that is when we will get a policy response. There are a lot of levers at the centre of government to prevent defaults."

Until the market slides into crisis, or bounces back on a big stimulus package or some other government intervention, investors are inclined to just sit tight.

"Either good news is going to come out and people will realise that the Chinese banking system will not implode, and you are talking about a once-in-a-decade valuation opportunity, or it will be the opposite," said Robert Jones, the head of FCL Advisory, which advises wealthy investors.

Mainland equities have been locked in a range-bound trading pattern since 2010. The common narrative told by analysts is that the economy has been grappling with excess liquidity following a 4 trillion yuan stimulus package announced by Beijing in 2009 in response to the global financial crisis. Banks lent heavily at the urging of the central government, and firms expanded quickly, thanks to easy credit.

Unlike developed markets in the West, where banks and companies have had to work through a painful period of retrenchment involving bankruptcies and high unemployment, the mainland economy has floated on an ocean of state-provided liquidity.

This has been reflected in the Chinese equities, which staged a massive rally in 2009 but have since drifted down.

"China is in a post-stimulus hangover. If [it] had not done the stimulus, we would have seen a more sustained rebound," Sanft said.

This has been reflected in declining volatility levels in the Hang Seng Index since 2007.

The pervasive view among analysts is that the market needs something big to reverse the softness, and that will either be a mainland equities market crisis or a big central government intervention, or both.