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Battered Hang Seng Index trading below book value for third time in 27 years may signal massive rally in Hong Kong stocks

  • The Hang Seng Index traded as low as 0.92 times its net asset value in March, as stock prices dropped below the book values of the 50 constituents
  • When the index’s price-to-book ratio fell below 1 in 1998 and 2016, it rose at least 36 per cent in the following year

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People wearing face masks walk past an electronic board displaying the Hang Seng Index price on March 26, 2020. Photo: AP

Hong Kong’s stocks are so beaten down that the Hang Seng Index is now trading below its net asset value for only the third time in almost 30 years.

The 50-member benchmark was valued as low as 0.92 times the book value in March, meaning the stock prices were below the stated values of the constituent companies. It was the third time the metric has dropped below 1, according to Bloomberg data that began to track the valuations in 1993. The Hang Seng last traded at 0.99 times the net asset value.

That is probably an auspicious omen for stocks, if history is any guide. When the Hang Seng’s price-to-book ratio was below 1 in 1998 and 2016, the equity gauge jumped at least 36 per cent in the following year.

The Hang Seng Index, which was developed by the bank of the same name in 1964, is the world’s only major equity benchmark that has dipped below the net asset value, as the coronavirus epidemic has swept through global financial assets. The multiple for the Standard &Poor’s 500 index is 2.89 times and that for the Shanghai Composite Index is 1.36 times.

The battered valuation prompted GF Securities to make a bullish call on the city’s stocks for the second quarter and Guosheng Securities to describe it as a “golden” buying opportunity.

“Low valuations don’t constitute a reason for buying, but extreme low ones may do,” said Liao Ling, an analyst at GF Securities in Shanghai. “The extremely low valuations have already implied pessimism about an overseas crisis scenario and worsening fundamentals. There’s no need to be overly pessimistic and we recommend adding Hong Kong stocks in the second quarter.”

Of the 50 companies on the Hang Seng Index, 26 are trading below book value. Shares of Swire Pacific, a conglomerate that runs businesses from property and food to airlines, had the biggest discount to stated value, with a price-to-book value of 0.27 times, according to Bloomberg data.

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