Reaching for the stars: a sustained rally in Hong Kong-listed stocks?

China’s first solo mission to explore Mars is set to begin in February when its Tianwen-1 probe reaches the red planet’s orbit ahead of an eventual landing of a rover on the surface. Hong Kong-listed equities could also reach for the stars this year. This includes both Hong Kong domestic (i.e. the Hang Seng index or HSI) and Chinese-focused companies (Hang Seng China Enterprises Index or HSCEI) indices. Our optimism is predicated on three factors.

First, there is plenty of the cash on the side-lines yielding little in the banking system. This is ready to be deployed in the stock market. Hong Kong dollar-denominated narrow M1 money supply (including checking accounts) is currently growing at more than 30% a year, the fastest growth rate in over a decade, and typically leads the stock market¹.

Given that the Hong Kong Monetary Authority (the central bank) pegs the Hong Kong Dollar to the US dollar, the Special Administrative Region’s (SAR) monetary expansion effectively moves in lockstep with loose Fed policy. Fed easing does not look likely to end anytime soon. In December, the Fed strengthened its forward guidance on Quantitative Easing (i.e. asset purchases) and expects its policy interest rate to remain near zero until the end of 2023. This suggests that Hong Kong’s money supply is set to grow at a rapid pace and provide fuel to drive its stock market higher.

Second, north of the border, the Chinese authorities have made plenty of financing available to backstop output during the pandemic. China’s so-called credit impulse, which captures fiscal support and bank credit, is currently at over 6% of annual GDP, the biggest increase since 2014². Accommodative policy increases the probability that China’s economic recovery has further to run and adds support to company earnings. In turn, this should encourage capital flows to the mainland. Considering that Hong Kong acts as a financial conduit, some capital is likely to spill over to the SAR and lift investor stock market optimism.

Third, Hong Kong should gain from an expected multilateral approach by the US over trade policy under a Biden administration, compared to Donald Trump’s policy to impose ad hoc trade tariffs on China and issuing executive orders to delist Chinese companies in the US. Moreover, the risk of further economic sanctions imposed on Hong Kong from the US and curbs on HK’s banking operations may have also lessened.

Much of the risks revolving around Hong Kong is related to China’s relationship with the States. Considering unfavourable US public opinion on China in opinion polls, Joe Biden could maintain a hard-line stance by introducing human rights and environmental matters as a pre-cursor to reducing trade tariffs. Since China is unlikely to negotiate on both these areas, the market could be disappointed. The recent arrest of local activists, opposition politicians, as well as a US lawyer, under the national security law, could also potentially sour investors’ enthusiasm in Hong Kong listed stocks. Nevertheless, the sharp rise in liquidity in Hong Kong provides a once in a blue moon opportunity to follow the money, which could benefit its stock market.

Source: 1, 2 Refinitiv/Smith & Williamson Investment Management, data as at 8 January 2021

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

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Investment does involve risk. The value of investments and the income from them can go down as well as up. The investor may not receive back, in total, the original amount invested. Past performance is not a guide to future performance. Rates of tax are those prevailing at the time and are subject to change without notice. Clients should always seek appropriate advice from their financial adviser before committing funds for investment. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.

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