Amid heightened social tensions, Hong Kong investors should brace for a precarious year
Patrick Ho says investors are right to worry as an increasingly volatile Hong Kong encounters economic headwinds that weren’t there during the Occupy Central protests in 2014
After the violence in Mong Kok, murmurs of an unstable social environment left investors ambivalent about the city’s future. Social unrest typically dampens investor sentiment, and it is no different in Hong Kong.
Once inconceivable, vicious confrontations between disgruntled locals and police have become more commonplace. The Mong Kok violence had no bearing on the dazzling Lunar New Year celebrations that went ahead without disturbance the next day. Since stores were closed for the holiday, there was little direct impact to retail sales in the area. But a deeper impression on markets has lingered against a backdrop of existing economic woes.
Hong Kong’s stalwart property sector is shaking – housing prices have slid 10 per cent from the 2015 peak and could sink another 10 per cent this year alone. Office rents could follow suit soon, and decline 5 per cent this year. The slumping market could worsen further if credit conditions tighten, interbank rates experience heightened volatility and property developers continue to pursue aggressive discount pricing to woo buyers.
Retail sales – a sector historically linked to the city’s economic vigour – have been hurt by the negative wealth effect of the slowing property sector and depressed tourist spending related to China’s economic slowdown and the strong US dollar. Retail sales growth has contracted for consecutive years, and retail giants Chow Tai Fook and Sa Sa reported very weak Lunar New Year sales – down 23 per cent and 19 per cent, respectively, from a year ago. And this trend is expected to persist – tourist arrivals in Hong Kong from the mainland for the first four days of the Lunar New Year, a period of vital importance to many retailers, fell 11 per cent year-on-year, compared to a 6.7 per cent year-on-year rise for Macau.
Meanwhile, rising local interest rates threaten to destabilise Hong Kong markets. With the US Federal Reserve embarking on a rate hike path, the Hong Kong Monetary Authority may increase its interest rate alongside or even above US rates. This would come at a time when Hong Kong’s property market is flailing, Chinese tourist spending is declining and exports are weakening amid China’s economic deceleration.
For 2016, Hong Kong may well skirt recession, with economic growth slowing to 1 per cent, which is well below consensus forecasts.
After the 2014 “Umbrella Movement” roiled society, retail and property stocks suffered the most. By contrast, exporters and sectors such as utilities and telecoms remained relatively stable. But, back then, the local economy was in much better shape, with retail sales and property prices both on the rise. Thus, the impact to the broader economy from the mass protest movement was largely absorbed.
Now, with vulnerable Hong Kong markets facing powerful headwinds from traditionally reliable sources of growth, investors are questioning the city’s ability to cope with current and future instability – the markets do not have much room left to weather additional volatility. Small-scale disturbances like the Mong Kok riot are unavoidable, while the risk of a larger clash increases with each blowout, particularly ahead of the important Legislative Council election in September.
While the Lunar New Year mayhem won’t explicitly bring markets to their knees, the escalating conflict between demonstrators and police is aggravating already very sensitive economic conditions. Investors should brace themselves for a precarious 2016.
Patrick Ho is deputy head of equity, Asia Pacific, at UBS Wealth Management