Hong Kong earn­ings sea­son has lim­ited down­side for stocks

The Pak Banker - - BUSINESS -

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.

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