Bourse to write history
Pundits dismiss worries about HK market’s spectacular bull run
Barring any “black swan” making an unpalatable splash in the global economic or geopolitical realm, 2018 is poised to go down as a momentous year for Hong Kong stocks.
Although stark, vivid memories of market meltdowns in the past four decades are still very much alive in the minds of local investors, stock pundits have been greatly heartened by the spectacular bull runs on the Hong Kong and global markets in the past two weeks as records continued to fall in the SAR, Tokyo and on Wall Street, where a $1.5-trillion tax cut package presented a bonanza for corporate America and investor earnings.
Hong Kong’s performance has been exemplary, with the Hang Seng Index (HSI) having well surpassed the historical high of 31,958 set 11 years ago, and pushing on for a stunning close at 32,958 points on Wednesday on top of a sizzling 36-percent gain last year.
The stocks of the some of the biggest names in Chinese mainland business, notably tech and property titans, have been star performers on the Hong Kong bourse. Shenzhen-based internet behemoth Tencent Holdings — famous for its ubiquitous WeChat social network platform and now ranks among the world’s top five enterprises in terms of market capitalization — saw its share price propel to a historical high of HK$469 as closed on Wednesday, while financials surged broadly after a lukewarm performance last year, igniting the biggest boost for the new year rally.
Despite tightening policies on the mainland, multiple Chinese property developers have posted better-than-expected sales. Country Garden Holdings — based in Shunde, Guangdong province, and one of the country’s largest builders by sales revenue — has been on a roll, with its share price having soared from around HK$11 late last year to HK$18.48 earlier this month.
Market sentiment is high, bolstered, among other things, by better-than-estimated economic growth projections for the mainland and Hong Kong, the continued inflow of hot money from the mainland, as well as heightened anticipation of a dual-class share structure getting the nod from Hong Kong’s market regulators later this year.
Retail investors are also swooping in to reap gains with leveraged products. According to the city’s stock market operator, Hong Kong Exchanges and Clearing (HKEx), transactions of callable bull/bear contracts and warrants — the most popular structured products by “mom-and-pop traders” in Hong Kong — accounted for almost 20 percent of last year’s stock volumes.
The market’s latest winning streak has somewhat apprehension among investors that the setbacks of 2007 and 2015 could repeat themselves. But, watchers broadly agree that the current rally is healthy and solid on the back of a global recovery
For pension funds to be invested in the stock market, the shares of State-owned commercial banks will be almost all on the ‘buy list’.”
Kevin Leung, director of global investment strategy at Haitong International Securities
and strong corporate earnings of mainland companies.
“The mainland’s monetary policies had been very tight three years ago, accompanied by high bond yields, and very low nominal GDP (growth). The nominal GDP was close to zero in 2015 as we had calculated and, at that time, bond yields reached 6 to 7 percent. That’s a classic example of a bad outcome,” recalled Ajay Kapur, head of Asia Pacific and global emerging market strategy at Bank of America Merrill Lynch in Hong Kong.
But now, nothing is like in 2015. “The nominal GDP is close to 12 or 13, and bond yields at about 4 to 5, with a very neutral monetary policy. I’m very bullish on (mainland) listed names in Hong Kong,” he said.
In retrospect, nor does the current situation mirror that of 2007 when the HSI climbed 10,000 points in a little over two months on prospects of a pilot program allowing mainland people to invest directly in Hong Kong stocks on the “through train”.
After then-premier Wen Jiabao raised concern over the potential risks of an overheated market during a visit to Uzbekistan in late 2007, Hong Kong stocks went into a free fall, with the HSI plummeting more than 1,500 points on Nov 5 that year. The Asian financial crisis that erupted the following year further exacerbated sentiment, driving the city’s benchmark gauge to a historical low of 10,676 in October 2008.
“Compared to the previous two stock market rallies which saw steep rises, the HSI had climbed slowly through 2017, accompanied by steady increases in daily turnover on the Hong Kong bourse and sustainable corporate earnings,” said Ivan Li, research director at DBS Vickers Securities.
The average daily market turnover last year was $88.2 billion — up 32 percent from $66.9 billion in 2016 — HKEx data showed.
The price-to-earning (PE) ratio of the index stood at 15.2 as of Thursday (Jan 25), well above the historic average level of 12.5. Yet comparatively, the average PE ratio of the Shenzhen Component Index stood at 37.39. “Such valuation is attractive. We believe the market buying spree is still rational,” said Li.
Kevin Leung, director of global investment strategy at Haitong International Securities, said investors should be on the lookout for a correction in the short term but, in the long run, he believed that a spate of mainland preferential policies would well support the H-share market this year.
The first wave of support should be seen over the next two months when most listed companies will be announcing their annual results.
“Prior to that, we have actually seen many companies in the tech, real-estate and water resources sectors having issued profit alerts, such strong earnings will bring more positive news to the market by then,” Leung said.
With A shares poised to be included in to MSCI Index in June this year, along with news that three more provinces — Gansu, Zhejiang and Jiangsu — and the Tibet autonomous region have pledged a total of 150 billion yuan ($23.7 billion) in entrusted pension investment, Leung believed that the promising prospects in the A-share market would spill over to H shares. In particular, he is bullish on financials.
“For pension funds to be invested in the stock market, the shares of State-owned commercial banks will be almost all on the ‘buy list’,” Leung reckoned.
With the growing strength of financials, essentially the major component of the Hang Seng China Enterprises (H-share) Index, as well as prospects of more new economy companies, including Tencent, being included in the index this year, he expected the H-share Index to outperform the HSI in 2018.