Hong Kong earnings season has limited downside for stocks
Equity strategists and fund managers see more upside than downside for Hong Kong stocks as 94 companies prepare to report annual results this week. "Expectations are really, really low at the moment," said Joshua Crabb, head of Asian equities at Old Mutual Global Investors, in a phone interview. "The downside is still relatively limited."
In last year's earnings season from January through May 2015, 58 percent of companies on the Hang Seng Composite Index missed average sales estimates and 56 percent missed average earnings estimates, according to data compiled by Bloomberg. Among 11 companies that have reported so far in 2016, 55 percent have missed estimates for both earnings and sales.
The Hang Seng Composite Index has declined 13 percent this year and 17 percent over the past four months. If last year's results aren't as bad as investors expect or if executives are more upbeat about this year's outlook, stocks may see a short-term boost, said Haitong International Director of Global Investment Strategy Kevin Leung.
The Hang Seng Composite Index advanced 1 percent to 2,659.28 at the lunchtime trading break on Monday, led by financial and consumer goods companies. "Share prices are suggesting right now that 2015 results will be bad and 2016 will look pretty ugly as well," Leung said in a phone interview.
He sees potential upside for Internet companies, China property stocks and some consumer names. More small- and mid-cap companies are also considering raising dividends to appease shareholders, Leung said.
Other sectors that may surprise to the upside this reporting season include technology, telecom and consumer staples such as liquor and baby products, according to BNP Paribas Asia Pacific Equity Strategist Manishi Raychaudhuri. Insurance is the only segment among financials that he sees positively due to growth in new business and a broader range of investments.
Banks may underperform amid pressure on asset quality and increasing non- performing loans, Raychaudhuri said. Consumer discretionary companies will continue to be hurt by the decline in Chinese tourists. Leung expects fewer negative surprises as most companies with particularly negative results have already issued profit warnings.
Expectations "have come down fairly consistently" over the past year, said Herald van der Linde, Asia equity strategist at HSBC. He calculates that 2016 earnings per-share estimates in Hong Kong have been lowered by 2 percent in the last month alone and by 3 percent over the past three months. Foreign exchange headwinds and lower oil prices are largely priced into stocks already, he said.
It's too early to say whether 2016 estimates need to come down further, said Laura Luo, head of Hong Kong China Equities at Barings Asset Management. "If indeed we see more positive earnings or more positive guidance coming out from companies, then it will give a better sense of confidence of the overall market and the outlook for the economy itself," Luo said in an interview.