Hong Kong stocks’ discount to net assets entraps mainland Chinese funds betting on turnaround
- About 77 per cent of mainland China-domiciled mutual funds that focus on Hong Kong stocks have posted losses this year
- The Hang Seng Index trades at a 2 per cent discount to its book value, the fifth time this year it has been cheaper than its intrinsic value
Hong Kong stocks have become a valuation trap for mainland Chinese money managers.
“With lots of big-weight internet companies, the headwinds on Hong Kong stocks haven’t entirely receded and the market may still be finding a bottom now,” said Huang Senwei, a Shanghai-based strategist at Allianz Bernstein with US$686 billion in assets under management. “We prefer [mainland China’s] A shares to Hong Kong stocks, because of less regulatory uncertainty and more listings of companies with strong industry sentiment that are linked to green energy and carbon neutrality.”
With the overhang remaining, the risk of capital outflows from the city is also building up for local stocks that may be cheapened further. The Hong Kong dollar weakened to as low as 7.80 against the US dollar last week, nearing the level of 7.85 that will prompt an intervention by the city’s monetary authority to defend the local currency’s peg against the US dollar. The depreciation came after hawkish comments by the US Federal Reserve on the quicker withdrawal of stimulus drove the dollar index to a 16-month high.
China’s offshore stocks presented no immediate opportunity for piling in, as the MSCI China Index still commands a roughly 2 per cent premium to other emerging markets in valuation, according to Morgan Stanley.
Morgan Stanley forecasts that in a base-case scenario, the Hang Seng Index will end at 25,000 by the end of 2022, implying about a 5 per cent gain from its last close.
To be sure, historical trading data may at least offer some solace to technical traders. The Hang Seng Index rose almost 6 per cent in the following six months after it stayed below book value for 15 consecutive days in April last year.
For UBS Wealth Management, the time to rebuild positions in China’s new-economy stocks may come in the next six to 12 months, after investors digest the earnings forecast cuts for the sector, which will reflect an outlook of slowing growth.
“We think opportunities will emerge after we gain more clarity from regulatory and related events,” analysts led by Eva Xia at the Swiss money manager wrote in a report last month. “Specifically, we expect the market to gradually position into the projected high earnings rebound in the second half of 2022 and, upon greater clarity on the regulatory reset.”