What a difference a week can make.
I was in Hong Kong after the Chinese Central Bank eased monetary policy and the Chinese Politburo announced fiscal policy measures to stimulate the economy. Both the Chinese and Hong Kong stock markets rallied. The Chinese CSI 300 index rose 8.5% on 30 September, just before the Chinese National Day holidays.
This exceptional bounce surprised local investors who were used to fast-paced market actions. That continued after the one-day National Day holiday in Hong Kong (China is closed for a week longer). For the first time in a few years, I heard people talking about stocks over lunch or dinner at tables next to ours. Local media reported that Chinese tourists who visited Hong Kong took the chance to open accounts with banks and brokers, with long queues forming in some places[1].
The sharp change in sentiment can be seen in the chart below. This shows the performance of the Hang Seng China Enterprise index over 1 year. Note how volume surged after the policy announcement.
1 year performance - Hang Seng China Enterprise Index
Source: Financial Times
10 year performance - Hang Seng China Enterprise Index
Source: Financial Times
So will this rally last, bearing in mind that the stock market in China and Hong Kong is still below pre-COVID levels?
We wrote a blog on our view of this recent stimulus from China, which can be found here. This is followed by another blog looking at various Chinese equity market charts, which you can read here. We felt that it would be helpful to engage local market experts to get a “view on the ground.”
Our Chief Economist, John Calverley, our Chief Strategist, Gerry Celaya, and I talked to our old colleague Alan Luk. Alan was Head of Financial Markets at American Express Bank and Head of Private Banking at Hang Seng Bank. Alan now runs his asset management firm in Hong Kong, Winner Zone Asset Management.
First, Alan thought that the signal sent by the Chinese government was strong enough to swing investor sentiment. This was more powerful as Beijing combined measures in fiscal policies with monetary policies. That included the cut in the mortgage rate and issuing 2 trillion RMB of special bonds aiming to boost consumption and rescue local governments’ deficits. All would be real money being sent to the Chinese community.
At the same time, many domestic investors feel that Chinese and Hong Kong stocks have fallen so much that they can’t fall further. From a chart perspective, Alan pointed out that there was no selling pressure as the Hang Seng Index surged through the 17000 level. This was an important short-term positive.
Therefore, the injected liquidity from the Chinese government was used to buy both A shares in Chinese and Hong Kong stocks. There is a good chance that Chinese and Hong Kong stocks will remain strong for the next six months and may even perform better than the S&P 500.
According to Alan, there were signs that some hedge funds already switched their focus from RMB offshore dim sum bonds to stock markets.
Alan expected more policy announcements for the rest of the year, including further monetary and fiscal policy actions. However, the property market remains a long-term problem. It is challenging to solve despite some relaxation in buying rules by local Chinese governments in the big cities. The strong rebound of Mainland Chinese property developers does not imply they are out of the woods, and the key issue is the risk of a massive default in bonds issued by these developers. At the same time, the Chinese government also doesn’t want to risk a rapid devaluation in the Chinese Yuan or Renminbi (RMB). The US Federal Reserve started cutting rates by 0.5% in September, allowing the People’s Bank of China to stabilize the RMB.
It has been useful for us to hear from a local investment expert on the Chinese and Hong Kong stock markets. Tricio increased our asset allocation to Chinese equities to a neutral weighting in May 2024.. The current strong recovery has made this allocation pay off. We debated if it is time to go overweight at our latest investment committee meeting. The longer-term issues raised above mean that the outlook for the market is more uncertain after the next 3 to 6 months. Bear in mind that we also have the US presidential election, which could significantly impact global trade relationships.
For those outside Hong Kong or Asia who want to participate in a possible near-term rally in the Hong Kong stock market, there are UCITS qualifying exchange-traded funds on the Hang Seng Index available (for example, from Lyxor). There are also UCITS ETFs that specialise in the Hang Seng Technology Index, focusing more on Chinese technology companies listed in Hong Kong.
James Chu CFA
Head of Investment Solutions
[1] https://www.hk01.com/article/1063654 (in Chinese). Note that the surge in volume also reflects the flow from mainland Chinese investors to Hong Kong stocks (and vice versa) via the Stock Connect facility between Hong Kong and China.
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