Abacus | Why the Hong Kong bull market is set to run and run
Yes, debt levels in China are high, but much of it is owed by one arm of the state to another, meaning a liquidity crisis is unlikely. When international investors realise that, valuations have a long way to rise
World equity markets have started 2018 in maximum bullish form, and in the forefront of the global “melt-up” has been the Hong Kong stock market. In the first 17 trading days of the year, the city’s benchmark Hang Seng Index climbed 10 per cent, blowing through 2007’s record to set a new all-time high at 33,000. Meanwhile the H-share index of locally listed mainland companies shot up a remarkable 17 per cent.
With those increases, Hong Kong’s market comfortably outperformed both China’s onshore markets and the world’s big international markets.
The US market may also have been setting record highs, but the S&P 500 index only gained a relatively meagre 6 per cent.
Naturally, after the market rose so far so fast, plenty of market-watchers warned that Hong Kong-listed stocks had entered overbought territory. So it was no surprise last Thursday when the main indexes eased back slightly. But the pullback does not mean the bull market is over. Economic fundamentals, valuations, and buoyant capital inflows all suggest the rally has further to run.
Let’s start with the economics. International investors have long feared that the rapid growth of debt levels on the mainland would trigger a financial crisis and an economic slowdown that would hammer corporate earnings, and the prices of Chinese stocks listed in Hong Kong.