Despite Hong Kong equity markets bouncing back on Tuesday, Daiwa Capital Markets believes investor sentiment is subdued and it remains bearish about the Hong Kong stock market in the long term.
Echoing Daiwa's view, Goldman Sachs Asset Management says Hong Kong is now clearly in a recession and more capital will flow to the Chinese mainland.
If the current condition in Hong Kong improves, the equity market is likely to enjoy a rebound in the near term. But it will stay in a downturn and underperform other markets over the long run. Thus, strategic asset allocation is under way over the next 12 months
Paul Kitney, chief equity strategist for Asia Pacific at Daiwa Capital Markets
Hong Kong’s economy has already slipped into a recession amid a challenging environment as social unrest and Sino-US trade tensions continue to cast a shadow over Hong Kong, according to James Ashley, head of the international market strategy team at Goldman Sachs Asset Management.
He said geopolitical uncertainties were issues which need to be dealt with and taken into consideration, but they would not change economic fundamentals.
Ashley noted that since political uncertainties and measures taken by central banks cannot be quantified, he suggested investors could still find opportunities despite market volatility.
According to Ashley, as the opening up of the mainland accelerates, there will be more capital flows into the mainland market and Hong Kong may benefit from this. He expects China will continue to be the focal point for global investors.
Although Hong Kong will benefit from macro relief policies on the mainland, Paul Kitney, chief equity strategist for Asia Pacific at Daiwa Capital Markets, said there were still difficult challenges here.
The valuation of the Hong Kong equity market is significantly high, he noted. But the spill-over effect from the ongoing Sino-US trade disputes and worsening local political unrest require additional risk premium in the city.
Kitney said that if the current condition in Hong Kong improves, the equity market is likely to enjoy a rebound in the near term. But it will stay in a downturn and underperform other markets over the long run. Thus, strategic asset allocation is under way over the next 12 months.
He suggested investors focus on more resilient markets, which are not so sensitive to the global trade cycle such as India and other emerging markets. These markets are driven more by domestic and regional growth factors.
Daiwa cut its ratings for Hong Kong equities to “underweight” in August.
Hong Kong stocks recovered slightly on Tuesday after falling the most in three months the day before - despite protests persisting in the city.
The benchmark Hang Seng Index started Tuesday morning with gains, opening 137 points higher. It then became volatile and ended the day 138.73 points or 0.52 percent up at 27,065. The Hang Seng China Enterprises (H-share) Index rose 77.46 points or 0.73 percent to 10,691.
The MTR Corp, which owns and operates the city’s subway system, was again targeted by protesters on Tuesday. Shares in the MTR rose 1.15 percent to HK$44.15, after posting losses during the past four sessions. The shares plunged 3.1 percent after protest violence escalated on Monday.
Internet giant Tencent enjoyed a rally of 2.23 percent to HK$330.2, ending three days of losses. According to Bloomberg, 50 analysts consider Tencent a “buy”, seven see it as a “hold” but none regard it as a “sell”.
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