LD Capital When will the Hong Kong stock market start to rebound?

When will the Hong Kong stock market start its rebound, according to LD Capital?

Author: Lisa, LD Capital

Against the background of the Federal Reserve stopping interest rate hikes, major global funds reducing their allocation to Chinese stocks, and domestic stimulus policies being implemented, there is still no sign of foreign capital flowing back into the Hong Kong stock market. The Hang Seng Index remains weak, and based on historical situations, it can be judged that fundamental factors still dominate the direction of capital flow.

1. Review of the Hong Kong stock market trend

Looking back at the trend of the Hong Kong stock market over the past decade, the Hang Seng Index experienced two major uptrends from February 2016 to January 2018 and from March 2020 to February 2021.

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The first uptrend occurred during the period of the Federal Reserve raising interest rates and reducing its balance sheet. However, the Hong Kong stock market continued to rise without being constrained by external liquidity tightening. The reason is that the supply-side reforms and urban redevelopment policies implemented by the central government in 2016 drove domestic investment and real estate cycles, leading to robust economic growth domestically. From this wave of trends, it can be seen that the core factor influencing the performance of the Hong Kong stock market is internal growth rather than external environment.

The second uptrend occurred against the backdrop of the global COVID-19 pandemic, with fiscal measures being implemented and a special government bond of 1 trillion yuan being issued by the central government for epidemic prevention. At the same time, due to the relatively small disruption to the domestic supply chain caused by the epidemic, there was an increase in external demand and exports, leading to rapid economic recovery and strong performance in the stock market.

In the past year, the Hang Seng Index has experienced a rebound followed by a decline. Benefiting from the expectation of China’s economic recovery after the easing of the epidemic and the Federal Reserve’s marginal relaxation, the market 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, with a gain of over 50%.

However, the market’s rebound momentum ended due to factors such as domestic growth falling short of expectations and sticky US inflation. So far this year, the Hong Kong stock market has been the worst performer globally, underperforming major global indices, including A-shares, compared to the 36% and 28% gains of the Nasdaq and Nikkei indices. The main reason is the withdrawal of foreign capital and concerns about domestic growth recovery.

The Hong Kong stock market’s price-to-earnings ratio has contracted to 8.47 times, already below the long-term average of 1 standard deviation.

2. Major factors influencing the Hong Kong stock market

1. External environment

Due to the open nature of the financial market, Hong Kong stocks are often more susceptible to external influences. The Federal Reserve’s monetary policy affects the Hong Kong stock market through liquidity and valuation, particularly in the growth sector represented by internet technology and biopharmaceutical industries.

In November, the FOMC decided to pause rate hikes, combined with weak economic data and a slowdown in fiscal borrowing, which generated widespread optimism in the market. As a result, US bond yields rapidly declined from their high level of 5% in mid-October to around 4.4%.

In October, overall CPI and core CPI fell more than expected, with US October CPI at a year-on-year rate of 3.2% and core CPI at 4.0%, both lower than market expectations. The main reasons for the decline were falling energy prices and used car prices. Concerns about the impact of the conflict between Israel and Palestine on the oil market eased, leading to a decrease in crude oil prices and domestic gasoline prices in the United States.

Non-farm payrolls cooled significantly, and the unemployment rate slightly increased. On November 3, 2023, the US Department of Labor released the October 2023 non-farm data. Non-farm employment increased by 150,000, 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 thousands) in October

US unemployment rate in October

Both the US ISM manufacturing and non-manufacturing PMI showed a decline, recording 46.7 and 56.8, respectively. The Markit manufacturing PMI fell back into contraction territory, while the services PMI increased slightly.

Due to unsatisfactory auction results for long-term bonds and a possibility of temporary improvement in the US fiscal deficit in the fourth quarter, the US Department of the Treasury slowed down the pace of bond issuance in the quarterly refunding meeting. Based on the advice of the Treasury Borrowing Advisory Committee (TBAC), the Treasury Department reduced the estimated net borrowing for the fourth quarter to $776 billion, a decrease of $76 billion from the estimated amount in the August refunding meeting. After excluding the net redemption of $171 billion by the Federal Reserve, the actual net issuance for the fourth quarter is expected to decrease to $605 billion. After the announcement on November 1, the market responded positively with a significant decrease in the yield of 10-year US Treasuries. However, the actual situation of the November bond auction still indicates insufficient demand, and the fiscal pressure has not been completely alleviated. The bid-to-cover ratios for long-term bond auctions decreased synchronously, and the highest yields for 3-year, 10-year, 20-year, and 30-year US Treasury auctions were higher than the market rates on that day (when-issued yield).

Inflation fallback, slowing growth, and some relief over concerns about fiscal expansion have led the market to believe that there is a high probability of a cessation of rate hikes in December, with the current CME rate futures implying a 95.5% probability of no rate hike in December. Looking ahead, a downward trend in US bond yields is likely, with the pace potentially displaying a staggered decline.

2. Domestic Economy

Price levels indicate overall weak momentum in domestic inflation rebound. On November 9th, the National Bureau of Statistics announced the price data for October 2023, with national consumer prices falling by 0.2% year-on-year and 0.1% month-on-month. The decline in CPI is mainly due to the decline in food prices, mainly pork, and the decline in post-holiday consumer demand. The price of livestock meat fell by 17.9%, affecting a decrease of approximately 0.66 percentage points in CPI, with the price of pork specifically falling by 30.1% and affecting a decrease of approximately 0.55 percentage points in CPI; the price of eggs fell by 5.0%, affecting a decrease of approximately 0.04 percentage points in CPI; and the price of fresh vegetables fell by 3.8%, affecting a decrease of approximately 0.08 percentage points in CPI.

In October 2023, the national producer price index for industrial products fell by 2.6% year-on-year, remaining unchanged month-on-month, mainly due to the drag from production materials. Comparatively, the price of production materials fell by 3.0%, affecting a total decrease of approximately 2.35 percentage points in the producer price index for industrial products. Among them, the price of mining industry products fell by 6.2%, the price of raw material industry products fell by 2.3%, and the price of processing industry products fell by 3.0%; the price of living materials fell by 0.9%, affecting a decrease of approximately 0.24 percentage points in the producer price index for industrial products. Specifically, the price of food fell by 1.2%, while clothing and general daily use products both saw a 0.4% increase, and the price of durable consumer goods fell by 2.0%.

Comparatively, the price of production materials increased by 0.1% month-on-month, affecting a total increase of approximately 0.08 percentage points in the producer price index for industrial products. Among them, the price of mining industry products increased by 2.4%, the price of raw material industry products increased by 0.4%, and the price of processing industry products fell by 0.2%. The price of living materials fell by 0.1%, affecting a decrease of approximately 0.04 percentage points in the producer price index for industrial products. Specifically, the price of food fell by 0.3%, clothing prices increased by 0.1%, general daily use products remained unchanged, and the price of durable consumer goods fell by 0.1%.

In October 2023, the stock of social financing reached 37.417 trillion yuan, a year-on-year increase of 9.3%. In October, new social financing increased by 1.85 trillion yuan, an increase of 910.8 billion yuan compared to the same period last year. The weak demand for financing from residents and businesses, and the growth of social financing mainly comes from government financing. In October, the new financing from government bonds accounted for 85% of the total new social financing, totaling 1.56 trillion yuan out of 1.86 trillion yuan. There has been a decline in other sub-items, with the balance of RMB loans at 23.533 trillion yuan, a year-on-year increase of 10.9%, the same growth rate as the previous month, a decrease of 0.3 percentage points compared to the same period last year, and the new RMB loans are relatively historically low.

At the end of October, the balance of broad money supply (M2) reached 288.23 trillion yuan, a year-on-year increase of 10.3%, the same growth rate as the previous month, a decrease of 1.5 percentage points compared to the same period last year. The narrow money supply (M1) balance was 67.47 trillion yuan, a year-on-year increase of 1.9%, a decrease of 0.2 and 3.9 percentage points compared to the previous month and the same period last year, respectively. The circulating money supply (M0) balance was 10.86 trillion yuan, a year-on-year increase of 10.2%. Net cash withdrawals in the month amounted to 68.8 billion yuan. The M1-M2 liquidity ratio was -8.4%, a decrease of 0.2% compared to September, indicating that overall savings propensity has not been eased, and the degree of fund activation is still relatively low, indicating a weak economic performance.

In terms of consumption, the total retail sales of consumer goods in October reached 4.3333 trillion yuan, a year-on-year increase of 7.6%, an increase of 2.1% compared to September, supported by factors such as a low base and the pre-Double Eleven shopping festival. In terms of consumption type, retail sales of goods in October reached 3.8533 trillion yuan, a year-on-year increase of 6.5%; catering revenue 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 value added of industrial enterprises above the designated size increased by 4.6% year-on-year and by 0.39% month-on-month. From January to October, the total profit of industrial enterprises above the designated size reached 6,1154.2 billion yuan, a year-on-year decrease of 7.8%, narrowing by 1.2 percentage points compared to the previous month. The recovery of corporate profits has slowed down.

Since August, measures such as not recognizing houses but recognizing loans, reducing down payment ratios, and adjusting interest rates for existing first-home mortgages have been frequently implemented. Local government policies have continued to exert force, and there have been several important developments in recent times:

(1) On November 17, the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Securities Regulatory Commission jointly held a symposium for financial institutions, proposing the following: 1. “Three not lower thans”, namely, the growth rate of real estate loans of banks should not be lower than the average growth rate of banks, the growth rate of public loans to non-state-owned real estate enterprises should not be lower than the growth rate of real estate of the bank, and the growth rate of mortgage loans to non-state-owned real estate enterprises should not be lower than the growth rate of mortgages of the bank. 2. Regulatory agencies are drafting a white list that includes 50 state-owned and private real estate enterprises. Companies on the list will receive various supports including credit, debt, and equity financing, and the scope of the list has expanded compared to the beginning of the year. 3. There are plans to modify the methods for development loans, operating property loans, and individual housing loans. (2) On November 22, Shenzhen announced that the minimum down payment ratio for personal housing loans for second homes would be unified from the previous 70% for ordinary housing and 80% for non-ordinary housing to 40%, and the standards for ordinary residential housing would be relaxed. (3) The People’s Bank of China’s third-quarter report for 2023 on the implementation of China’s monetary policy, released on November 27, pointed out the need to improve macroprudential management of real estate finance, treat different types of real estate enterprises equally, and meet their reasonable financing needs. Normal real estate enterprises should not be denied credit, have credit withdrawn, or have credit cut off.

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

In recent years, sales and the willingness of real estate companies to acquire land have been weak. From January to October, China’s real estate development investment reached 9,592.2 billion yuan, a year-on-year decrease of 9.3%. Among them, residential investment reached 7,279.9 billion yuan, a decrease of 8.8%. The construction area of buildings has been continuously declining since May 2022, and there is no obvious turning point 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.

The central government will issue an additional 1 trillion yuan in national bonds for the year 2023 in the fourth quarter of this year. The additional bonds will be allocated to local governments through transfer payments to support post-disaster recovery and reconstruction, as well as to address shortcomings in disaster prevention, reduction, and relief efforts, thereby enhancing China’s ability to withstand natural disasters. The allocation for this year is planned to be 500 billion yuan, with the remaining 500 billion yuan to be carried over to next year. The national fiscal deficit will increase from 3.88 trillion yuan to around 4.88 trillion yuan, and the deficit rate is expected to rise from 3% to about 3.8%. Fiscal expansion is expected to become an important tool for boosting the market by stimulating corporate and household loans.

3. Fund Flows

Last week, there was a net outflow of funds in both northbound and southbound directions. Southbound funds flowed out by a total of HKD 406 million.

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

4. Summary

Against the backdrop of the Federal Reserve stopping interest rate hikes, major global funds reducing their allocations to Chinese stocks, and the introduction of stimulus policies domestically, there are still no signs of foreign capital flowing back into Hong Kong stocks, and the Hang Seng Index remains weak. Taking historical circumstances into consideration, it can be concluded that fundamental factors continue to play a crucial role in determining fund flows. With the economy still relatively weak, Hong Kong stocks are still in the process of gradually bottoming out, and a significant rebound depends on increased confidence in the improvement of fundamentals. Currently, there is a weak willingness to leverage in various sectors, and the recovery process is slow, with limited transmission of broad money to credit. The key to reversing the current trend lies in the continued efforts of fiscal and monetary policies to stimulate the credit cycle. One of the main drivers could be stimulus in the property market and increased leverage by the central government, which is already moving in that direction. The timing of the turning point will require close attention to upcoming fundamental data and the continuous transmission and amplification of policy support.

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