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Macroscope | Hong Kong’s stock market rebound: dead cat bounce or durable recovery?
- Technical factors, like the unwinding of the ‘Asia ex-China’ trade, seem to be driving Hong Kong’s stock rally, as opposed to underlying fundamentals
- In the longer run, the narrative around China’s economy and markets has to brighten considerably if Hong Kong stocks are to continue their recovery
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Who would have thought as recently as a few months ago that the Hang Seng Index would be the world’s best performing major stock market in April? Last month, Hong Kong’s benchmark index rose 7.4 per cent, bringing its gains since January 22 to 18.7 per cent and putting it on the cusp of a technical bull market.
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While Hong Kong stocks are still a staggering 42 per cent below their February 2021 peak, there has been a palpable shift in sentiment over the past month, with just over half the Hang Seng’s gains occurring since April 19. That global equities were down 3.4 per cent last month – the S&P 500 index had its worst month since September 2023 – makes Hong Kong’s rally all the more remarkable.
The city’s stock market is benefiting from a burst of unexpected tailwinds. The first is the sharp rebound in mainland shares, driven by signs that the economy has stabilised, recent measures to strengthen and deepen China’s capital markets and signals from Beijing that a more forceful response to the property-sector crisis is likely to materialise in the coming months.
On April 26, overseas investors purchased US$3.1 billion of onshore stocks via trading links with Hong Kong, a daily all-time record that contributed to three straight months of inflows into Chinese equities. The MSCI China index, which tracks Chinese equities listed at home and abroad, has outperformed benchmark indices in both developed and emerging markets since February.
The second tailwind is mainland investors’ aggressive purchases of Hong Kong stocks, fuelled by the cheap and high-yielding shares of Chinese state-owned enterprises listed offshore. Chinese regulators provided a further fillip to sentiment last month when they announced measures to expand the Stock Connect scheme with the city and encourage large mainland firms to list here.
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A vanishing fairyland dream: how China Evergrande rose, then crashed
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The third tailwind is the unravelling of the “Asia ex-China” trade that gained popularity among international investors last year. The combination of the dramatic unwinding of bets on interest rate cuts in the United States this year – only one reduction is now fully priced in – and a reallocation of funds from markets and asset classes that have borne the brunt of the fallout from “higher for longer” rates has benefited Hong Kong.
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