A number of leading Wall Street banks are starting to bet on a rebound for Hong Kong stocks, with some advising their clients it is time to look again at a market that has been hammered by months of political tumult.
Hong Kong’s benchmark Hang Seng index is one the world’s worst-performing major indices this year, returning just 1 per cent as the Asian financial hub has been rocked by anti-government demonstrations and the US-China trade war. By contrast, the S&P 500 has rallied 24 per cent.
On Wednesday, the IMF predicted Hong Kong’s economy would contract 1.2 per cent this year and grow only 1 per cent in 2020 in comparison with a 3 per cent expansion in 2018.
But some banks believe the Hong Kong market has been oversold despite the economic downturn and months of violent protests. Companies listed in the index derive much of their revenue from mainland China, meaning they would benefit from a “phase one” trade deal between the Washington and Beijing.
“This is the best buying opportunity that you’ve had since 2016,” said Mohammed Apabhai, head of Asia Pacific trading strategies at investment bank Citi, referring to a time when the market was heavily sold down as the Chinese economy hit a rough patch.
“Unless you believe that this is the end of Hong Kong and it’s never coming back — and we don’t — basically this means there’s a very significant probability that the market can rally 40 per cent,” he added.
Hong Kong stocks have a strong record for rebounding after crises. In the 13 months following the Asian financial crisis in the late 1990s, the Hang Seng surged about 170 per cent. In the seven months after the deadly Sars outbreak in 2003, it rallied nearly 70 per cent.
The bull case for Hong Kong stocks was further supported by looser monetary policy by the US Federal Reserve, Mr Apabhai added. Hong Kong shadows US monetary policy due to the local currency’s peg to the dollar.
Citi is not alone in predicting a better year for the Hang Seng, even though the political upheaval has led the economy into recession and hit tourism and retail sectors particularly hard.
Last month, Goldman Sachs advised its clients to buy shares in MTR, Hong Kong’s rail operator. The company’s operations have been targeted by demonstrators, with protesters repeatedly vandalising stations and blocking train lines.
“We could expect a rather quick turnround in its patronage trend [passenger numbers] once the situation stabilises,” Goldman wrote in a note to clients.
Analysts surveyed by Bloomberg tip earnings at Hang Seng-listed companies to rise by 7 per cent over the next 12 months, higher than forecasts for the S&P 500 and Japan’s Nikkei 225.
Credit Suisse is more cautious on the market’s prospects for the next year. But Jack Siu, senior Asia Pacific investment strategist at the Swiss bank, said Hong Kong equities had “never been so cheap” compared with other major markets.
Low valuations could put a floor of about 10 times earnings beneath the Hang Seng, or around 26,000 points, according to local brokers. The S&P 500 currently trades at a price-to-earnings ratio of 21.
“For the time being, I think the market won’t test much further [below] this level,” said Louis Tse, managing director of VC Asset Management and veteran Hong Kong trader.
But the IMF, in its annual Article IV consultation on Hong Kong that was released on Wednesday, struck a more bearish note. It called on the territory to implement a stronger fiscal stimulus than already announced of 1.5 percentage points of gross domestic product a year on average to restore growth.
Unusually, this included urging the city known for its ultra-low income taxes and laissez-faire economy to raise top personal income tax rates and tap other revenue sources to fund the programmes.
“A deterioration of the sociopolitical situation and delays in addressing structural challenges of insufficient housing supply and high income inequality could further weaken economic activity and negatively affect the city’s competitiveness in the long term,” the report said.