Sell Hong Kong stocks when the likes of HSBC raise prime rates, historical data suggests
- All four industry groups within the Hang Seng Index posted losses in the one month after HSBC last raised its best rates in September 2018
- The HKMA raised its base rate to the highest level since 2019 and leading banks could raise their prime rates in the fourth quarter, Invesco says
Investors should hold on to cash or reduce their stock holdings in the event commercial banks in Hong Kong start raising their prime rates for the first time in almost four years, if history is any guide.
In a three-month horizon, all but the utilities sub-gauge declined, with financials and developers declining 8.1 per cent and 0.8 per cent, respectively, while the Hang Seng Index slumped by 8.2 per cent.
“The best period to own Hong Kong banks is up till the rate hike, since higher rates mean higher savings deposit rates that could incrementally squeeze margins,” said David Chao, a strategist at US money manager Invesco in Hong Kong. “Overall operating margins could still expand albeit at a slower pace after the prime rate hike.”
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With regards to developers, Chao said that rising mortgage rates and the weak macro backdrop could mean further headwinds for the sector, “though current valuations reflect much of the soft patch,” he added.
Hong Kong’s leading banks could raise their prime rates in the fourth quarter, he said.
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Rate-sensitive stocks such as banks and property developers typically face a challenging business environment after a hike in the prime rate, which is also a reference for mortgage rates. Higher borrowing costs might cool the world’s most expensive property market as demand for credit weakens.
The policy tightening will test Hong Kong’s US$5.3 trillion stock market, which has rebounded 12 per cent from a six-year low in March after China softened its crackdown on technology stalwarts and largely contained a resurgence in new Covid-19 infections.
Hong Kong’s commercial banks are now under pressure to raise their prime rates, or they risk shrinking profit margins and customers withdrawing deposits to seek other higher yielding assets.
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Currently, the prime rate at HSBC, its subsidiary Hang Seng Bank, and Bank of China (Hong Kong) stands at 5 per cent. Borrowing costs at Standard Chartered Bank and most other local lenders stand at 5.25 per cent.
Half of the 12 economists surveyed by Bloomberg expected the prime rate to rise by 25 basis points or less by the end of the year, while four forecast a 50-basis point increase. The remaining two forecast a lift-off of between 75 and 100 basis points.
