Hong Kong stocks may reverse losing streak in 2024 on likely Fed rate cut, China policy support: HSBC Jintrust

Earnings of Hang Seng Index companies is expected to rise more than 9 per cent next year, according to HSBC Jintrust Fund Management
The benchmark has shed 45 per cent since touching a near-record high on February 17, 2021

Hong Kong stock market

Zhang Shidongin Shanghai

Published: 2:48pm, 28 Dec 2023

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Hong Kong stocks could end their longest correction in 15 years in 2024, as US monetary policy easing boosts risk appetite and corporate earnings improve on China’s economic recovery, according to HSBC Holdings’ mainland China fund-management venture.

Expectations of an interest-rate cut by the Federal Reserve sometime in the middle of next year will help reverse fund outflows and China’s ramp-up of policy support for its economy will allay fears of a hard landing in the property market, HSBC Jintrust Fund Management said in a report on Wednesday. Earnings growth for the companies on the Hang Seng Index is expected to quicken to more than 9 per cent next year, it said.

The city’s stock benchmark has shed 45 per cent since touching a near-record high on February 17, 2021. It has slumped 14 per cent this year, making it the worst-performing prominent stock index globally, as China’s recovery faltered after the promise of the economic reopening fizzled out, and overseas investors shifted their focus to the US and other Asian markets such as Japan and India.

“Hong Kong stocks have a chance of a turnaround from the long-running headwinds,” HSBC Jintrust said. “Liquidity may see significant improvement in the middle of the year. The Fed’s dovish stance will strengthen the downtrend in the yield on longer-dated US bonds. The worst of the liquidity squeeze because of the Fed’s tightening has already passed.”

HSBC has a 49 per cent stake in the Shanghai-based asset-management firm, which oversees 35 mutual funds with 45.6 billion yuan (US$6.4 billion) in assets. Its Hong Kong Stock Connect Selected Equity Fund has lost 26 per cent of its value this year.

The Hang Seng Index is valued at 5.7 times realised earnings, the cheapest among the world’s major markets, the data shows. The gauge now trades at a 4 per cent discount to its book value, compared with an average premium of 18 per cent over the past decade. It jumped 2.5 per cent to 17,043.53 for the steepest gain in six weeks on Thursday.

Amid such beaten-down valuations, sentiment seems to be showing some signs of improvement. The Hang Seng Tech Index, which tracks the biggest technology stocks trading in the city, has recovered all the losses spurred by a draft proposal governing China’s video game industry last Friday, after the regulator said it would reconsider some of the controversial clauses that restrict spending by players.

Meanwhile, bets on monetary easing in the US have been building up recently on signs of cooling inflation, facilitating outflows to cheaper assets elsewhere globally. The yield on the 10-year Treasury bond dropped below 3.8 per cent for the first time in five months on Wednesday, suggesting cuts in the borrowing costs are in the offing. The yield hit a 16-year high of 5 per cent in October.

Hong Kong’s market may remain subdued initially next year before stocks begin to rise, according to HSBC Jintrust. It prefers major players in the internet and consumer sectors whose earnings may beat expectations. HSBC Jintrust believes stocks with high dividend yields may become more attractive amid falling US interest rates.

“Hong Kong’s market may get a double boost from valuation expansion and earnings growth in 2024,” the firm said. “There’s no need to be pessimistic now.”