UBS Asset Management joins top brokerages in predicting Hong Kong bull market rally to continue
Brokerage sees volatility in Hong Kong stocks as a temporary setback
UBS Asset Management on Tuesday joined a chorus of brokers including Morgan Stanley, Goldman Sachs and HSBC that expect Hong Kong’s stock market rally to continue on the back of capital inflow from the mainland.
Geoffrey Wong, head of global emerging markets and Asia-Pacific equities at UBS Asset Management, said the market would resume its uptrend despite the recent volatility that has seen the city’s benchmark Hang Seng Index drop from a 10-year high reached last Wednesday.
The bull run on Hong Kong’s stocks has already lasted 21 months but the Hang Seng Index was still the cheapest on a valuation basis among the world’s major indices, including the S&P 500 Index, China’s Shanghai Composite and Europe’s Stoxx 600 Index.
Analysts from Goldman Sachs said last month that China’s “new-economy” stocks will help push Hang Seng Index to a historic high of 32,000 by the end of next year.
Beijing has recently stepped up efforts to manage excessive risk in the financial markets, triggering concerns that Chinese bond yields will continue their ascent while stocks will underperform global peers because of tighter liquidity conditions.
“The authorities seem to be quite aware of the impact on the financial markets, so they are giving a lot of time for the financial institutions to adjust,” Wong said. “It will only cause a little bit of stock market volatility.”
China’s securities regulator said that it was suspending the approval of new mutual funds that were meant for investing in Hong Kong’s equity market, according to people familiar with the matter, putting a temporary cap on southbound capital.
The value of Hong Kong shares held by mainland investors through the Shanghai-Hong Kong and Shenzhen-Hong Kong stock connect programmes has grown over sixty fold since the end of 2014.
At the end of October, investors in China held HK$808.8 billion (US$103.6 billion) worth of shares through stock connect links, compared to HK$13.09 billion in 2014, the year the Shanghai link was set up, according to figures provided by the Hong Kong stock exchange.
“I would interpret this move as dampening of volatility rather than any reversal of southbound trade, which generally I think should increase over time,” Wong said.
Moreover draft guidelines unveiled earlier this month for the asset-management industry that would ban financial institutions from guaranteeing investors against losses was likely to hurt only second tier banks and unlikely to cause much problem to China’s big four banks, Wong said.
Financials will do well as banks’ non performing loans come down and credit growth begins to pick up and also because the stocks are not expensive, he added.
China’s transition away from fixed assets investments to services was very good for insurance, education, consumer cyclical stocks, while companies like Huawei and drone maker DJI were likely to benefit from the nation’s digitalisation, Wong said, adding that he was overweight in IT, hardware, internet and e-commerce stocks.