Hong Kong stocks set for more gains in 4th quarter, drawing support from capital inflows

HSBC has issued a bullish forecast for Hong Kong stocks in the fourth quarter, banking that capital inflows will continue despite the potential risk of a US interest rates hike and a backlash from the Brexit factor.

Southbound investment inflows through the Shanghai Hong Kong stock Connect rose to 10.8 per cent of turnover in September, compared to 3.5 per cent of turnover in December of last year.

“The capital inflows from the Chinese mainland to Hong Kong will not ease in the short term,” HSBC global asset management senior market specialist Grace Tam said.

Tam said the further relaxation of the Shanghai Connect and the launch of Shenzhen Link will provide mainland investors more channels to invest on the Hong Kong market. Foreign assets are looking increasing appealing as Chinese investors weigh up the outlook amid continuing depreciation expectations for the Chinese yuan.

Under Shenzhen-Hong Kong Stock Connect, approximately 417 eligible stocks will be covered, while 318 are available to Shanghai investors.

“The capital inflows into emerging markets has surged since Brexit was announced in June,” said Tam. “And I believe it is just a start and the trend will not convert in the near future.”

Capital inflows into emerging markets rose to US$64 billion in the third quarter, the highest since 2014, according to the data from Institute for International Finance

Hong Kong stocks recorded their best quarterly performance since 2009 in the third quarter, lifting the benchmarket Hang Seng Index 12.04 per cent

Tam expects the momentum will soften in the fourth quarter from the prior three months because of uncertainties from the US election, question marks over the direction of interest rate hikes, and the potential for shocks related to the British exit from the European Union.

Among sectors, Tam said she was upbeat on automotives and insurance companies, while she was negative on Chinese banks because of a likely rise in non-performing loans that will drag on earnings.

For China’s property developers, Tam was generally positive, citing improving national household affordability and an attractive dividend payout. However she warned that a slowdown in transaction volume growth and tightening policies will weigh on the outlook.