Some economists predict that Hong Kong’s stock market is likely to extend the rally and stay robust this year amid the economy recovery and the economic transformation on the Chinese mainland. (PAUL YEUNG / BLOOMBERG)
As global investors cashed out on their winnings from an extraordinarily impressive show on the Hong Kong stock market last year, the poser on everyone’s lips has been: Will there be a follow-through in 2018?
Market pundits on both sides of the fence have been cautious, down to earth. The bulls are convincing, citing excessive liquidity, the Chinese mainland’s ongoing economic transformation and projected bumper corporate earnings as the key growth drivers, while their opposing peers are warning investors against resting on their laurels, pointing to growing protectionist sentiments, particularly in the United States, a potential slowdown on the mainland and its deleveraging process, as well as continued US interest-rate hikes in the new year.
We expect Hong Kong stocks to continue seeing record inflows for the next two to three years as southbound capital continues to grow, boosting market liquidity
Chay Kai Kong, senior portfolio manager for Greater China Equities at Manulife Asset Management
Hong Kong was the cream of the crop in 2017, spurred by astronomical gains in the stock prices of technology titans, abundant market liquidity and the almost unstoppable inflow of the mainland funds into the SAR to snap up Hong Kong-listed shares.
The city’s blue-chip large capitalization stock benchmark Hang Seng Index (HSI) rallied nearly 36 percent in 2017, smashing through the 30,000-point barrier for the first time in a decade. The Hang Seng China Enterprise Index (HSCEI), which tracks the share price movements of the mainland companies listed in Hong Kong, was equally buoyant, soaring more than 24 percent last year.
On January 11, the HSI registered the first 13 straight day gains since July 31, 1964, the start date selected when the index was launched November 1969. The index closed at 31,120 points in the same day, steps away from the all-time high of 31,958 reached in October 2007.
The HSI performance was the best among other major world equity markets, outperforming those of the US and other European peers for the first time since the global financial market rebound in 2009.
Bullish analysts reckon that a buoyant stock market is here to stay this year, arguing that the catalysts fueling share price gains remain firmly intact.
“The Hong Kong stock market valuation is still significantly lower than that of matured markets, like the US. With emerging markets set to lead a world recovery in 2018, alongside the mainland’s ongoing economic transformation, Hong Kong’s stock market may extend the rally and stay robust,” predicted Cheng Shi, managing director, chief economist and head of research at ICBC International Holdings — the research arm of Industrial and Commercial Bank of China, one of the nation’s “Big Four” lenders.
DBS Vickers — the equity trading unit of Singapore’s DBS Group Holdings — expects the HSI to hit the “magical figure” of 33,000 in 2018, as hot mainland funds may continue to snap up Hong Kong shares in the first half of this year. The HSCEI is tipped to touch 13,500 this year, whereas the price-to-earnings ratio for 2018 would be at the moderate 9.4 times level.
Credit Suisse sees an approximate 10-percent return on the Hong Kong equity market, driven mainly by earnings growth without further valuation re-rating. At the current level, the HSI is trading at 12.4 times the 12-month forward price-to-earnings ratio, while the HSCEI is trading at 7.2 times the 12-month forward price-to-earnings ratio.
BOCOM International, the securities research arm of Bank of Communications Company, expects the local stocks gauge to continue climbing to well above the peak level recorded in October 2007, with corporate earnings growing by 10 percent. The HSI skyrocketed to an all-time high of 31,958 points on Oct 30, 2007.
Manulife Asset Management — the asset management arm of Canadian insurer Manulife Financial — remains constructive on mainland, Hong Kong and Taiwan shares next year.
“We expect Hong Kong stocks to continue seeing record inflows for the next two to three years as southbound capital continues to grow, boosting market liquidity,” said Chay Kai Kong, senior portfolio manager for Greater China Equities at Manulife Asset Management.
“This is due to solid corporate earnings growth seen for 2018 and a moderate valuation (mainland, Hong Kong and Taiwan equities’ forward price-to-earnings ratio for 2018 at just around 13.5 times), which is below historical peaks and less than those of developed markets, such as Europe and the US,” Chay said.
Other market analysts are more reserved, believing that last year’s stocks bonanza would not be repeated this year, citing worries about the US interest-rate hike cycle, the US Federal Reserve’s balance sheet reduction, a slowed mainland economy and corporate earnings, as well as mainland policy uncertainties, that stand to dent market sentiment.
The mainland’s financial deleveraging has been of top concern to investors as the tightening of financial policies has led to higher market interest rates and weaker equity markets.
Following earlier measures to deleverage the bond market and rein in excesses in shadow banking, the central government announced a tightening of financial regulations late last year, notably with regard to asset management products and lending to non-bank financial institutions. Financial conditions are being tightened through regulatory instead of monetary policy means.
“While financial policy tightening on the mainland should not necessarily impede economic growth substantially, a slightly faster-than-projected slowdown in overall credit growth, on the other hand, could easily result in a significantly more pronounced slump,” warned Louis Kuijs, head of Asia Economics at think-tank Oxford Economics.
Another pressing factor is the passage of the US tax reform bill in December last year, an act that would have far-reaching consequences for global capital flows and which would affect Hong Kong’s equity market performance in 2018. The first drastic tax reform in the US in the last three decades will slash the corporate tax rate from 35 percent to 21 percent, and levy a 15.5-percent tax rate on repatriated cash earnings by US companies. It’s expected that both measures will attract global capital back to the US, thus reducing the oil in the tanker to support a global equity market rally.
Besides curbing capital flows, opponents of the US tax reform slam the proposal, saying it will also add US$1.5 trillion over the next 10 years to the US$20-trillion US national debt, while it can only expand US economic growth by 0.8 percent over a decade — far lower than the 3-percent expansion anticipated. If the US tax reform package does not elicit economic growth as expected, it will put another brake on a potential global stock market rally next year.
Citibank came up with a rather more cautious estimate of the HSI for this year, saying the index could stay around 29,500, taking into account factors like the monetary policy tightening pace by global central banks, the regional geopolitical situation and the pace of financial deleveraging on the mainland.
Hong Kong’s stock market is likely to be more volatile in 2018 as last year’s market rally might not be sustainable.
“Institutional investors worldwide are wary of fragile market conditions, distorted asset prices and systemic risks caused by central bank interventions,” cautioned Fabrice Chemouny, head of Asia Pacific at Natixis Investment Managers.
“Renewed volatility is set to be the main feature for equities in 2018 — an overwhelming 78 percent of institutions expect an increase in equity volatility in 2018. Looking back on the absence of volatility in 2017, some 59 percent of institutional investors surveyed believed this is unsustainable and is, in fact, a cause for serious concern,” Chemouny warned.
According to survey by Natixis Investment Managers released in December last year, two-thirds of the corporate decision makers at 500 investment institutions polled said they expected asset bubbles to negatively impact overall market performance in the new year.