Caixin
Nov 27, 2017 05:01 PM
FINANCE

Hong Kong Stocks Pare Gains, Not Optimism

While analysts predict the Hang Seng Index will continue to experience strong growth through the first half of 2018, the U.S. Federal Reserve hiking interest rates could cause it it drop sharply by the year's end. Photo: Visual China
While analysts predict the Hang Seng Index will continue to experience strong growth through the first half of 2018, the U.S. Federal Reserve hiking interest rates could cause it it drop sharply by the year's end. Photo: Visual China

When Hong Kong’s benchmark Hang Seng Index brushed near its 10-year high last Wednesday, many in the market asked: where are we in this bull run?

Although the index has pared some of its earlier gains since then, it still has risen 35% this year and is one of the stellar performers globally. Several heavyweight institutional investors told Caixin that relatively low valuations, corporate-earnings growth and fund inflows are set to continue propelling Hong Kong stocks even higher, probably through the first half of next year.

“Asia-Pacific equities have long been undervalued compared with U.S. and European equities. Globally, funds are also reducing their exposure to Asia, particularly China. That means, in spite of potentially strong gains in Asia-Pacific equities, they will still likely stay relatively undervalued,” Raymond Chan, chief investment officer, Equity Asia Pacific at Allianz Global Investors, said Thursday.

As of Sept. 17, price-to-earnings ratios for MSCI Inc.’s Asia ex Japan index were about 27.4% lower than the USA Index. Low valuations will be one of the key trading themes for Asia-Pacific equities next year, Chan added.

The Dow Jones Industrial Average also hit new highs this year. After brushing through 20,000 in early January, the index had risen 19% this year to 23,526.18 as of Nov. 23.

To Timothy Moe, chief Asia Pacific equity strategist for Goldman Sachs, the recent strength of the stock markets has been buoyed by improving corporate fundamentals.

For the MSCI Asia ex Japan index, for instance, more than half of its gains were driven by faster corporate earnings growth. Moe said, based on his assumption that earnings at Hang Seng Index constituent companies will likely rise 14% this year, a slightly above-average price-to-earnings ratio of 13.7 of the Hang Seng Index is actually reasonable.

As long as earnings continue to grow while valuations do not get too high, the uptrend of the market is not ending yet, he added.

Specifically, on China, the earnings of companies in the MSCI China Index rose more than 20% during the first nine months of this year, compared with a year ago. Goldman Sachs expects earnings to grow by another 18% next year.

Kinger Lau, chief China equity strategist at Goldman Sachs, added that the MSCI China Index had for the first time recorded 11 straight months of positive returns. But he warned that as year-end approaches, correction may ensue as some investors might understandably grow agitated and sell down their stock holdings.

Stock connect programs are another major impetus, as they direct more funds to the Hong Kong market, Lau said.

As of Nov. 22, southbound funds via stock connect programs have reached $37 billion. Lau expects this trend will continue into next year, and predicts southbound funds will reach $50 billion in 2018.

Inflows have helped boost the activity of the Hong Kong stock market, Lau added. Daily turnover of Hong Kong stocks has exceeded HK$100 billion ($12.8 billion) for 15 consecutive trading days, with the highest single day at over HK$157.4 billion.

CCB International Securities said the Hang Seng Index could rise to 34,500 during the first half of 2018. But U.S. Federal Reserve will continue to hike interest rates next year, which could push up borrowing costs, eat into gross profit margins and slow earnings growth, so therefore some investors could take their profits and exit. So the index could fall back to 28,000 in the second half of 2018.

Contact reporter Aries Poon (ariespoon@caixin.com)

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