Hong Kong stocks downgraded by BCA strategists on ‘triple assault’ from US rates, China slowdown and shrinking global trade

Hong Kong stocks have been downgraded by BCA Research on concerns that prices could slip further amid a “triple assault” from rising US interest rates, China’s weak economic outlook and shrinking global trade.

The research firm cut its recommendation on stocks in MSCI Hong Kong Index to underweight from neutral relative to global benchmarks, according to a report published on November 9. It maintained an underweight stance on investible Chinese stocks, having downgraded them from neutral in March 2021.

MSCI Hong Kong tracks 34 companies including AIA Group, Hong Kong Exchanges and Clearing (HKEX) and Sun Hung Kai Properties, with a combined market capitalisation of US$325.3 billion, according to its October 31 fact sheet. The index has declined 29 per cent in the first 10 months, following a 3.9 per cent loss in 2021 and mirroring the performance of the city’s benchmark Hang Seng Index.

“Hong Kong equities are seemingly cheap, but the low equity valuations are justified,” strategists including Arthur Budaghyan wrote in the report. “Despite falling by 43 per cent from an early 2021 top, share prices of Hong Kong-domiciled companies remain at risk in absolute terms and will underperform the Asian, emerging markets and global equity indices.”

Hong Kong’s economy, which contracted in the past two quarters, faces growing pressure from the Federal Reserve’s policy lift-off since March. This has forced the Hong Kong Monetary Authority (HKMA) to march upwards in lockstep and intervene in the currency market to defend the local currency peg to the US dollar.