Hong Kong stocks dip into bear market, wiping off US$976 billion in market cap since January

Hong Kong stocks fell on Monday, with the Hang Seng Index briefly sliding into bear territory, amid an escalating trade war between China and the United States and worsening fundamentals on the mainland.

The benchmark of 50 constituents on the city’s exchange fell by 1.9 per cent to an intraday low of 26,453.29 points in afternoon trading, taking its decline from a record high in January to 20 per cent, ending a 23-month bull run that drove up the city’s Hang Seng Index by more than 80 per cent. A drop of this magnitude is viewed by some analysts as entry into a bear market. The gauge last moved into this territory in August 2015.

The shift to a bear market was swift, as Hong Kong stocks were the best performers among the world’s major markets just last year, with the Hang Seng Index recording a 36 per cent gain.

By market close on Monday the Hang Seng Index had clawed back some losses, ending down 1.33 per cent, or 360.05 points, at 26,613.42, while the Hang Seng China Enterprises Index had dropped 1.19 per cent, or 125.92 points, to 10,433.62.

All sub-indexes finished the day lower, with financials and property stocks leading the way down.

The escalating trade war between China and the US, a decrease in buying by mainland Chinese investors and recent economic woes in such developing economies as Turkey and Indonesia are among factors that have unnerved investors.

“The weak momentum on the Hong Kong market will probably continue,” said Ken Chen, a strategist at KGI Securities in Hong Kong. “For now, neither the worsening fundamentals in China nor the risks from the developing nations have seen any change. So the drags on the stocks will persist.”

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The Hong Kong stock market, Asia’s third largest, has had US$975.6 billion – about the size of Indonesia’s entire gross domestic product in 2017 – in market capitalisation wiped off since January 26, when the Hang Seng Index closed at an all-time high.

Among financials, China Construction Bank lost 1.65 per cent on Monday to HK$6.56, while ICBC dropped 1.59 to HK$5.55 and HSBC Holdings fell 1.27 per cent to HK$66.35.

The property sector felt the impact of positive wage inflation figures in the US on Friday which pushed up fears of interest rate increases, said Alex Wong, director of asset management at Ample Capital.

CK Asset fell 2.14 per cent to HK$54.95, Evergrande was down 1.33 per cent to HK$26.05, China Overseas dropped 1.3 per cent to HK$23.60 and Country Garden retreated 1.85 per cent to HK$10.60.

Concerns over the rising costs faced by Apple dragged down related stocks, after US President Donald Trump used Twitter to urge the California-based iPhone maker to manufacture more products at home.

Apple suppliers Sunny Optical and AAC Technologies were the two biggest blue-chip losers, sliding 4.28 per cent to HK$89.50 and 3.63 per cent to HK$79.70, respectively.

Telecommunications equipment company ZTE fell 4.75 per cent to HK$13.24.

Monday also marked the day China Merchants Port Holdings and Bank of East Asia were removed from the Hang Seng Index. The two long-term constituents of the Hang Seng Index were replaced by Chinese drug maker Sino Biopharmaceutical and China’s largest knitwear manufacturer, Shenzhou International Group Holdings.

The two debutants finished the day lower. Sino Biopharmaceutical fell 2.9 per cent to HK$8.97, after HSBC Global Research lowered its target price from HK$12.3 to HK$10.10. Shenzhou International Group Holdings dropped 0.87 per cent to HK$96.10.

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Mainland China’s benchmark Shanghai Composite Index moved into bear market territory in late June. On Monday it closed down 1.21 per cent, or 32.81 points, at 2,669.49, while the CSI 300 index of larger companies lost 1.45 per cent, or 47.57 points, to 3,230.07.

The ChiNext gauge of small-caps dropped 2.41 per cent, or 34.41 points, to 1,390.82.

The Hong Kong market has had a rocky ride this year, with bad news often intertwined with good. For example, China cut the reserve requirement ratios of banks while pledging to increase spending on infrastructure investment to support growth. The 100-day volatility on the Hang Seng Index rose to its highest level in two years in 2018, according to Bloomberg data.

After the decline, the Hang Seng Index traded at 10.1 times reported earnings, Bloomberg data showed, as against a low of 8.9 times in February 2016, when the gauge started an 81 per cent run-up through to January 2017.

Hong Kong-listed stocks are now 17 per cent cheaper than the mainland’s yuan-traded equities, according to an index compiled by Hang Seng Bank to track the price gap between the two markets.

Slowing corporate earnings growth has added to the weak sentiment. The 1,375 Hong Kong-listed companies that released interim results in August posted average earnings growth of 8.8 per cent, down from a 26 per cent annual increase for 2017, according to Haitong Securities.