LD Capital Macro Review When will Hong Kong stocks start rebounding?

Analysis of Hong Kong Stock Market Recovery LD Capital Macro Review

First, Hong Kong Stock Market Review

Looking back at the performance of Hong Kong stocks over the past decade, the Hang Seng Index experienced two major upward trends from February 2016 to January 2018 and from March 2020 to February 2021.

The first upward trend occurred during the period when the US Federal Reserve raised interest rates and reduced its balance sheet. However, the Hong Kong stock market continued to rise without being constrained by external liquidity tightening. The reason was due to the supply-side reform and urban redevelopment initiated by the central government in 2016, which drove domestic investment and real estate cycles, leading to robust economic growth. From this trend, we can see that the core factor driving the performance of the Hong Kong stock market is internal growth rather than external factors.

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The second upward trend occurred against the backdrop of the global COVID-19 pandemic. With fiscal stimulus measures and the issuance of 1 trillion yuan in special anti-pandemic government bonds by the central government, combined with minimal disturbances to the domestic supply chain and increased external demand and exports, the economy achieved rapid recovery, leading to a strong performance in the stock market.

In the past year, the Hang Seng Index initially rebounded and then declined. Benefiting from the expectations of economic recovery after the lifting of the Chinese pandemic and the Federal Reserve’s marginal easing, the market bottomed out and rebounded from November 2022. The Hang Seng Index rose from 15,000 points on October 31, 2022, to a high of 22,700 points on January 23, 2023, an increase of over 50%.

However, due to factors such as lower-than-expected domestic growth and persistent US inflation, the market’s rebound momentum ended. Hong Kong stocks have been underperforming globally this year, lagging behind major global indices, including A-shares, with weak performance compared to the 36% and 28% increases in the Nasdaq and Nikkei indices, respectively. The main reason is the withdrawal of foreign capital and concerns about the recovery of domestic growth.

The price-to-earnings ratio of Hong Kong stocks has contracted to 8.47 times, which is below the long-term mean of one standard deviation.

Second, Major Influencing Factors of Hong Kong Stocks

1. External Factors

Due to its open financial market nature, Hong Kong stocks are usually more susceptible to external factors. The monetary policies of the US Federal Reserve, particularly liquidity and valuation, affect the Hong Kong stock market, with the growth sectors represented by internet technology and biomedicine having a significant impact.

In November, the Federal Reserve (FOMC) once again paused interest rate hikes, combined with weak October economic data and a slowdown in fiscal bond issuance, which has led to widespread optimism in the market. US bond interest rates have rapidly declined, falling to around 4.4% after peaking at 5% in mid-October.

In October, overall CPI and core CPI fell more than expected. US October CPI was 3.2% YoY, and core CPI was 4.0% YoY, lower than market expectations. This was mainly due to a decline in energy and used car prices, as concerns about the impact of the Israeli-Palestinian conflict on the crude oil market eased and oil prices fell, leading to a decline in domestic gasoline prices in the US.

Non-farm payroll growth cooled significantly, and the unemployment rate rose slightly. On November 3, 2023, the US Department of Labor released non-farm employment data for October 2023, showing an increase of 150,000 non-farm jobs, lower than the expected 180,000 and only half of the previous value. The unemployment rate rose slightly by 0.1 percentage points to 3.9%.

US seasonally adjusted non-farm employment population in October (thousands of people)

US unemployment rate in October

Both US manufacturing and non-manufacturing PMIs declined, recording 46.7 and 56.8, respectively. The Markit manufacturing PMI fell again into the contraction zone, while the services PMI rose slightly.

Due to unfavorable long-term bond auction results and the potential interim improvement of the US fiscal deficit in the fourth quarter, the US Treasury has slowed down the pace of bond issuance in the fourth quarter refinancing meeting. Based on the recommendation of the Treasury Borrowing Advisory Committee (TBAC), the treasury department has reduced the estimated net issuance size for the fourth quarter by $76 billion compared to the August refinancing meeting, with an actual net issuance of $605 billion after excluding the Fed’s net redemption amount of $171 billion. After the news was announced on November 1, the market reacted positively with a significant decline in the yield of 10-year US bonds. However, the actual situation of the November bond auction still reflects insufficient demand, and the fiscal pressure has not been completely alleviated. The bid-to-cover ratio for long-term bond auctions has also declined, and the highest yield for 3-year, 10-year, 20-year, and 30-year US bond auctions has exceeded the market yield on the day (when-issued yield).

Inflation easing, slowed growth, and some relief in concerns over fiscal expansion have led the market to believe that there is a high probability of a halt to interest rate hikes in December. The current CME interest rate futures imply a 95.5% probability of no rate hike in December. Looking ahead, a decline in US bond rates is likely and the pace may resemble a step-by-step decline.

2. Domestic Economy

The level of prices shows overall weak momentum in domestic inflation. On November 9th, the National Bureau of Statistics released the price data for October 2023. The national consumer price index (CPI) dropped by 0.2% year-on-year and by 0.1% month-on-month. The decline in CPI was mainly due to the drop in food prices, particularly pork prices and the decrease in post-holiday consumer demand. Prices of livestock meat decreased by 17.9%, impacting CPI by approximately 0.66 percentage points, with pork prices falling by 30.1% and impacting CPI by approximately 0.55 percentage points; egg prices dropped by 5.0%, impacting CPI by approximately 0.04 percentage points; vegetable prices dropped by 3.8%, impacting CPI by approximately 0.08 percentage points.

In October 2023, the national industrial producer price index (PPI) dropped by 2.6% year-on-year and remained unchanged month-on-month, mainly due to the drag from production materials. Compared to the same period last year, the prices of production materials dropped by 3.0%, impacting the overall level of industrial producer prices to drop by approximately 2.35 percentage points. Among them, prices in the mining industry dropped by 6.2%, prices in the raw materials industry dropped by 2.3%, and prices in the processing industry dropped by 3.0%; prices of living materials dropped by 0.9%, impacting the overall level of industrial producer prices to drop by approximately 0.24 percentage points. Among them, food prices dropped by 1.2%, while clothing and general daily commodity prices both increased by 0.4%, and durable consumer goods prices dropped by 2.0%.

Compared with the previous period, the prices of production materials have risen by 0.1%, which has led to an overall increase of about 0.08 percentage points in the level of industrial producer prices. Among them, the prices of mining industry have risen by 2.4%, the prices of raw material industry have risen by 0.4%, and the prices of processing industry have decreased by 0.2%. The prices of consumer goods have decreased by 0.1%, leading to a decrease of about 0.04 percentage points in the level of industrial producer prices. Among them, food prices have decreased by 0.3%, clothing prices have risen by 0.1%, general daily necessities prices have remained stable, and durable consumer goods prices have decreased by 0.1%.

At the end of October 2023, the total stock of social financing was 37.417 trillion yuan, an increase of 9.3% year-on-year. In October, new social financing was 1.85 trillion yuan, an increase of 910.8 billion yuan compared to the previous year. The growth of social financing mainly came from government sector financing, as the financing demand of residents and enterprises was relatively weak. The 1.56 trillion yuan of new government bond financing accounted for 85% of the total new social financing of 1.86 trillion yuan. Other sub-items have mostly declined. The RMB loan balance was 23.533 trillion yuan, an increase of 10.9% year-on-year. The growth rate was the same as the previous month, but 0.3 percentage points lower than the same period last year. The new RMB loans are relatively low compared to historical levels.

At the end of October, the balance of broad money supply (M2) was 28.823 trillion yuan, an increase of 10.3% year-on-year. The growth rate was the same as the previous month, but 1.5 percentage points lower than the same period last year. The balance of narrow money supply (M1) was 6.747 trillion yuan, an increase of 1.9% year-on-year. The growth rate was 0.2 and 3.9 percentage points lower than the previous month and the same period last year, respectively. The balance of currency in circulation (M0) was 1.086 trillion yuan, an increase of 10.2% year-on-year. Net cash withdrawal was 68.8 billion yuan. The M1-M2 ratio was -8.4%, a decrease of 0.2% from September, indicating that overall savings propensity has not been relieved, and the degree of fund activation is still relatively low, indicating weak economic conditions.

In terms of consumption, the total retail sales of consumer goods in October stood at 4.3333 trillion yuan, a year-on-year increase of 7.6%, with a growth rate 2.1% higher than September, supported by factors such as a low base and the upcoming “Double Eleven” shopping festival. In terms of consumption types, the retail sales of goods in October were 3.8533 trillion yuan, a year-on-year increase of 6.5%; and the revenue from catering was 480 billion yuan, an increase of 17.1%, mainly due to increased demand during the National Day holiday and dining out.

In October, the year-on-year actual growth of industrial added value of large-scale industries increased by 4.6%, and the month-on-month increase was 0.39%. From January to October, the total profit of industrial enterprises above designated size in the country reached 6,154.2 billion yuan, a year-on-year decrease of 7.8%, a decrease of 1.2 percentage points compared to January to September, and a slower recovery of corporate profits.

Since August, measures such as not recognizing housing loans, reducing down payment ratios, and adjusting the loan interest rates for existing first-time home purchases have been frequently implemented. Provincial and municipal policies have continued to exert force, and there have been several important developments recently:

(1) On November 17th, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission jointly held a forum for financial institutions, proposing: 1. “Three Not-Lower-Than” measures, namely, the increase rate of real estate loans by each bank should not be lower than the average growth rate of banks, and the increase rate of corporate loans to non-state-owned real estate enterprises should not be lower than the real estate growth rate of the bank, and the increase rate of personal mortgages to non-state-owned real estate enterprises should not be lower than the mortgage increase rate of the bank. 2. The regulatory authorities are drafting a white list that includes 50 state-owned and private real estate enterprises, and the listed companies will receive support in various aspects including credit goods, debt rights, and equity financing. The scope of the list has expanded compared to the beginning of the year; 3. Amendments are being considered for development loans, operating property loans, and personal housing loan methods. (2) On November 22nd, Shenzhen officially announced that the minimum down payment ratio for individual home loans for the second house would be adjusted from the original 70% for ordinary housing and 80% for non-ordinary housing to 40%, and the standards for ordinary residential properties would be relaxed. (3) The People’s Bank of China, in its report on the implementation of China’s monetary policy in the third quarter of 2023 released on November 27th, pointed out the need to improve the macro-prudential management of real estate finance, treat different types of real estate enterprises equally and meet their reasonable financing needs, and not hesitate to issue, withdraw, or cut off loans to normally operating real estate enterprises.

However, under weak expectations for house prices, there has been no apparent improvement in current data. The effects of policies in various regions have been limited. The transaction area of commercial housing in 30 major cities is at a low point during the same period in the past five years, and the listing price index of second-hand houses has continued to decline recently.

In recent years, sales and real estate developers’ willingness to acquire land have been sluggish. From January to October, the national real estate development investment reached 9.5922 trillion yuan, a year-on-year decrease of 9.3%, with residential investment reaching 7.2799 trillion yuan, a decrease of 8.8%. The construction area of houses has continued to decline since May 2022, with no obvious turning point signal as of October. In October, the Real Estate Development Prosperity Index (referred to as the “National Real Estate Prosperity Index”) was 93.40, declining for the sixth consecutive month.

In the fourth quarter of this year, the central government will issue an additional 1 trillion yuan of national bonds in 2023. All the issued national bonds will be arranged to the local governments through transfer payments to support post-disaster recovery and reconstruction, and to fill the shortfalls in disaster prevention, reduction, and relief, thus enhancing the country’s ability to withstand natural disasters. 500 billion yuan is planned to be used this year, and 500 billion yuan will be carried over to next year. The national fiscal deficit will increase from 3.88 trillion yuan to 4.88 trillion yuan, and the deficit rate is expected to increase to about 3.8%. Fiscal expansion is expected to become an important driver to boost the market and stimulate loans for enterprises and residents.

Three, Capital Flows

Last week, both southbound and northbound funds were net outflows. The total outflow of southbound funds last week amounted to HKD 406 million.

EPFR data shows that overseas active funds have been continuously flowing out of overseas Chinese stock markets for the past 21 weeks.

Four, Summary

In the context of the Federal Reserve’s halt to interest rate hikes, major global funds lowering their allocation to Chinese stocks, and the implementation of stimulating policies domestically, there is still no sign of foreign capital flowing back into Hong Kong stocks. The Hang Seng Index remains weak, and historical conditions suggest that fundamental factors continue to be the key driver of capital flows. With the overall weak economic data, Hong Kong stocks are still in the process of gradually finding a bottom, and a significant rebound will rely on increased confidence in fundamental improvements. Currently, there is a weak desire for leverage in various sectors, and the recovery process is slow, with the transmission of loose monetary policy to loose credit being hindered. The key to reversing this downward trend lies in the continued efforts of fiscal and monetary policies to stimulate the credit cycle. The most significant lever may still be stimulating the real estate market and increasing leverage in central finances, which the government seems to be moving towards. It is important to closely monitor when the turning point will occur, based on upcoming fundamental data and the continuous transmission and reinforcement of policy support.

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