The Hong Kong equity market has yet to see the worst of the capital outflow in the region, with a possible tapering of the US bond-buying programme and concerns about a slowdown in the mainland economy keeping fund managers on edge.
In the middle of this year, massive capital outflows from Hong Kong stocks and equity funds focused on the mainland caused the Hang Seng Index to slump by 16 per cent in less than a month. But fund managers surveyed by the South China Morning Post say it may get even worse in the next 12 months.
Seven of the 11 fund management companies surveyed said they expected more money to flow out of the local stock market as emerging-market stocks, currencies and bonds face fiercer sell-offs once the US starts to taper its quantitative easing.
Among the sectors fund managers are upbeat about in the coming quarter, the internet sector is the favourite. This is largely because of policy support for the consumption of IT products on the mainland.
Technology firms, which were the second-most popular sector in the last survey in June, have lost ground since. Most fund managers are now bearish on them, as some of these stocks show signs of being overbought.
The Hong Kong stock market was one of the major beneficiaries of the ultra-loose global monetary policy following the financial crisis in 2008. Some US$100 billion has flowed into Hong Kong since the fourth quarter of 2008, according to the Monetary Authority chief executive Norman Chan Tak-lam.
The US central bank's decision to maintain its current bond purchase plan surprised the market on September 18, with the Hang Seng Index gaining 5 per cent since then. But most fund managers polled said the rebound was mostly of a technical nature, thanks to the inevitable tapering down the road.
"Hong Kong is currently the worst-ranked developed economy in terms of expected returns," said Thomas Poullaouec, head of strategy and research at State Street Global Advisors. "The signal is also deteriorating month after month, and three out of the four factors - value, momentum and macro - are negative, while only sentiment is positive."
US 10-year treasury yields were expected to reach up to 5 per cent in the next three to five years, he said, meaning the rising attractiveness of US treasuries would push more investors to cut emerging-market holdings, which carry higher risks.
Some US$2.43 billion has been withdrawn from the "Greater China" equity sector since May, when the US central bank signalled it would rein in its US$85 billion monthly bond-purchase programme, according to data service EPFR. Invesco chief investment officer Paul Chan said tens of billions more would flow out of Hong Kong.
However, some fund managers said they believed the Fed tapering factor is largely priced in, and that what would really affect the market is economic recovery, or a lack of it, in China.
"The debate right now is whether the government will set next year's growth target conservatively at 7 per cent or higher," said Victoria Mio, chief investment officer at Robeco.
"Earnings growth also bottomed out in the third quarter of last year, and management guidance for the second half of this year has generally been upbeat," Mio said.
Amundi fund manager Kenrick Leung expects high single-digit earnings growth for firms on the Hang Seng Index next year.
Asset managers from 11 leading international fund-management companies took part in the survey: Allianz Global Investors, Amundi, Edmond de Rothschild Group, Henderson Global Investors, HSBC Global Asset Management, Invesco, JP Morgan Asset Management, Manulife, PineBridge, Robeco and State Street Global Advisors.