2024-08-20
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Reporter of China Business Network: Wang Haimin Editor of China Business Network: Peng Shuiping
Recently, the Hong Kong stock market has become a hot commodity in the eyes of major investment banks.Goldman Sachs、CITIC Securities, CICC and many other leading domestic and foreign securities firms have released research reports saying that they are currently bullish on the Hong Kong stock market and are more optimistic about the performance of Hong Kong stocks than the A-share market. Many securities firms believe that relatively better performance is the main reason for the stronger performance of Hong Kong stocks in recent times.
Since the beginning of this year, the overall performance of the Hong Kong stock market has indeed been stronger than that of the A-share market. Since the second half of the year, the Hang Seng Index has continued to outperform major A-share indices. It is worth noting that from the beginning of the year to August 16, the cumulative inflow of southbound funds into the Hong Kong stock market reached HK$457.7 billion, the highest level in the same period of the previous year; however, since the beginning of this year, overseas active funds have continued to flow out of the overseas Chinese stock market represented by Hong Kong stocks and Chinese concept stocks.
According to brokerage observations, the current southbound funds account for an estimated 15%-20% of Hong Kong stocks' daily turnover, a level that has significantly increased compared to a few years ago. From the perspective of industry preferences, southbound funds have preferred sectors such as central state-owned enterprises with high dividends since the beginning of this year, but in some traditional large-cap blue-chip stocks (such as Internet companies), the total holdings of southbound funds are still relatively low.
Recently, while the A-share market remains weak, the Hong Kong stock market has attracted the attention of many leading domestic and foreign securities firms.
In fact, the overall performance of the Hong Kong stock market has been stronger than that of the A-share market this year. According to Choice data, as of today's close, the Hang Seng Index has risen by 2.72% this year, outperforming all other core indexes in the Shanghai and Shenzhen markets except the dividend index. Since the second half of the year, although overseas markets have experienced significant fluctuations, the Hang Seng Index has also outperformed major A-share indices.
Recently, including Goldman Sachs, CITIC Securities,CICCLeading domestic and foreign securities firms, including CITIC Securities, have released research reports saying they are optimistic about the Hong Kong stock market. CITIC Securities recently pointed out that overall, the recent external disturbances have eased, the concerns about the US economic recession have eased, and the reversal of carry trades has also come to a temporary end; and if the Fed cuts interest rates in September, the interest rate gap between China and the United States is expected to narrow, and the Hong Kong dollar interest rate will also fall, which is beneficial for capital inflows into Hong Kong stocks. The expectation gap of Hong Kong stocks' fundamentals will also be gradually realized with the disclosure of the interim report, reversing the pessimistic expectations of foreign capital and consolidating market confidence. Combined with the current valuation level of Hong Kong stocks close to the bottom, the Hong Kong stock market is expected to usher in a monthly valuation repair in the future.
In addition, many brokerages also pointed out that they are more optimistic about the performance of Hong Kong stocks than A-shares. Goldman Sachs recently released a research report pointing out that, measured over 12 months, maintaining a high allocation to A-shares will bring additional benefits due to its low sensitivity to global risk factors. In the short term, Goldman Sachs is still more optimistic about the offshore market based on the AH stock market rotation model. The model predicts that due to various macro, market and geopolitical reasons, H-shares will outperform A-shares by about 3% in the next three months.
CICC recently pointed out that the Hong Kong stock market closed higher last week, basically recovering the lost ground caused by the turmoil in overseas markets in early August. Although it is difficult for Hong Kong stocks to completely "stay out of trouble" under external turmoil, the decline is relatively controllable with low valuations and low positions, and it can rebound and repair quickly, reflecting greater elasticity than A-shares. In addition, CICC released a research report earlier saying that at the current position of Hong Kong stocks, the downside protection provided by valuations and positions is relatively sufficient. More importantly, the rising expectations of the Federal Reserve's interest rate cuts and the appreciation of the RMB caused by external fluctuations have opened up more room for domestic policies. If the policy can take this opportunity to continue to exert its strength, it will provide more support for subsequent capital inflows and market rebounds. In this case, the market will have short-term support, and will show greater elasticity than A-shares in stages, but it will still be more reflected in the structural market in shocks.
According to the reporter's observation, in the view of many leading securities firms, relatively better performance is one of the main driving forces behind the stronger performance of Hong Kong stocks in recent period.
Huatai SecuritiesThe research report "The Logical Foundation of the Relatively Strong Hong Kong Stock Market" released recently pointed out that the resilience of the performance of the weighted stocks and the restoration of the macro/micro liquidity environment have jointly promoted the recent upward trend of the Hong Kong stock market. Specifically, the relative resilience of performance is the cornerstone of the recent better performance of Hong Kong stocks compared with A-shares.
In August, Hong Kong stocks began to disclose the latest quarterly or semi-annual financial reports. According to statistics from CITIC Securities, as of August 16, 2024, although only 89 constituent stocks in the Hang Seng Index have disclosed the latest financial reports, they include many large-weight stocks, with a total market capitalization of 44.7%. Judging from the constituent stocks that have disclosed their performance, the total revenue in the first half of 2024 fell 0.6% year-on-year, but the profit growth rate was 16.1%. The former was slightly lower than expected, and the latter was 0.7 percentage points higher than expected. In particular, the profits of the leading Internet companies that have recently disclosed weights are higher than expected; and Tencent,JD.com、AlibabaIn the first half of this year, the companies repurchased approximately US$6.7 billion, US$3.3 billion and US$10.6 billion respectively, reflecting that the companies are full of confidence in themselves.
At present, some market institutions also hold relatively optimistic expectations for the fundamentals of the leading Internet companies with a large weight in Hong Kong stocks. The director of investment research at Danyi Investment pointed out to reporters, "We were very optimistic about the leading Internet companies in Hong Kong stocks at the beginning of the year. The annual report and the repurchase against the trend, coupled with the low valuation of the Hong Kong stock market, made us optimistic about the full-year earnings this year. In the short term, as the United States began to enter the interest rate cut channel in September, domestic monetary policy has greater room for force. At the same time, after the disclosure of the second quarter report, related industries and sectors with good fundamentals are expected to usher in a round of valuation repair. We will pay attention to core leading companies with high shareholder returns and a good competitive landscape. On the other hand, we will seize the opportunity to deploy technology growth stocks with fundamentals exceeding expectations under low expectations."
However, the above-mentioned banks' optimism about the Hong Kong stock market and their related logic have not been recognized by all institutions.
Guojin SecuritiesChief Strategy Analyst Zhang Chi said in an interview with reporters today, "We understand that the reason why the Hong Kong stock market was stronger than the A-share market in the first half of the year was mainly due to its "U.S. dollar-like assets" attribute, which was actually driven by liquidity. Throughout the first half of the year, we can see that the performance of the U.S. dollar index was very resilient, rising from around 101 at the beginning of the year to 106 at the end of June. Under this background, non-U.S. currencies will naturally face more general depreciation pressure, while the Hong Kong dollar will not face this problem due to its special "linked exchange rate" system. Therefore, when the global economy is in a "worse than worse" mode, funds flow to the United States for risk aversion, and the U.S. economy is also under pressure to slow down, resulting in funds "idling" in the financial market. We have observed that the global financial conditions index is very loose, which has prompted investors to pursue U.S. dollar-like assets, including Hong Kong stocks."
Zhang Chi said, "Looking ahead to the second half of the year, I tend to think that this excess will disappear. Even if the domestic monetary policy easing space opens up, the performance of the Hong Kong stock market may not be as good as that of the A-share market. At the current point in time, on the one hand, the Fed's interest rate cuts in September are basically a done deal, and once the rate cuts are implemented, offshore US dollar liquidity will be tightened. At the same time, we judge that the probability of a "hard landing" of the US economy is relatively high, so the impact of the "overseas liquidity trap" may be more obvious. As an offshore market, Hong Kong stocks will be more affected by the tightening of global funds. On the other hand, the fundamentals of the Hong Kong stock market depend on the domestic economy and are more sensitive than A-shares. As domestic exports are dragged down by overseas prosperity, especially if the US economy "hard lands", the negative impact may be greater, and Hong Kong stocks will face greater pressure than A-shares."
"In summary, it is expected that if the global economy impacts the domestic fundamentals and weakens, or if global liquidity tightens, Hong Kong stocks will be weaker than A-shares. On the contrary, only by waiting for the domestic interest rate cuts to be increased in intensity and frequency, so that the 'denominator' (debt reduction) outperforms the 'numerator' (asset decline) to achieve a credit recovery, and cooperating with the lifting of the overseas 'liquidity trap', will Hong Kong stocks be significantly stronger than A-shares in the rebound." Zhang Chi said.
The recent good performance of the Hong Kong stock market is due to the movement of southbound funds. According to statistics from CITIC Securities, from the beginning of the year to August 16, the cumulative inflow of southbound funds into the Hong Kong stock market reached HK$457.7 billion, the highest level in the same period of the previous year. This is in stark contrast to the small net outflow of northbound funds from A-shares during the same period.
The divergence between the continued inflow of southbound funds into the Hong Kong stock market and the continued outflow of overseas active funds from overseas Chinese stock markets (Source: Screenshot of CICC research report)
However, at the same time, the continued outflow of overseas active funds from overseas Chinese stock markets (Hong Kong stocks + Chinese stocks listed in the US) and the continued inflow of southbound funds into the Hong Kong stock market showed a clear divergence.
This divergence has been going on for a long time. According to a research report by CICC, overseas active funds have been flowing out of overseas Chinese stock markets for nearly two years. During this period, southbound funds have also been flowing into the Hong Kong stock market.
In this regard, Zhang Chi analyzed to reporters that the existence of the above phenomenon does not mean that foreign capital is really withdrawing from the Hong Kong stock market in large numbers. "This deviation does exist. But in addition to this, we can pay attention to another indicator at the liquidity level, the M2 of the Hong Kong market. Since the beginning of this year, the growth rate of Hong Kong's M2 has actually continued to rise, from +2.1% at the beginning of the year to +7.4% in June. This actually reflects that the outflow of foreign capital in the Hong Kong market is very limited, but rather a clear net inflow. The relatively strong performance of Hong Kong stocks is not only due to the inflow of southbound funds, but also the global safe-haven funds' layout of US dollar assets."
It is worth mentioning that according to Choice data statistics, since 2014, southbound funds have shown a net inflow trend in Hong Kong stocks every year, but this does not seem to be strongly correlated with the Hong Kong stock market. For example, since 2019, the scale of net inflows of southbound funds into Hong Kong stocks has exceeded 100 billion yuan each year, but the Hong Kong stock market has continued to fall during these years. From 2020 to 2023, the Hang Seng Index fell for four consecutive years.
Southbound funds have been net inflows into Hong Kong stocks in each year since 2014 (Source: Choice data)
Why is it that southbound funds often cannot influence Hong Kong stocks? Regarding the above situation, Dong Yi, a senior analyst of Hong Kong stock strategy at Shenwan Hongyuan Research, pointed out to the reporter of "Daily Economic News", "According to our calculations, the current southbound funds account for an estimated 15%-20% of the daily turnover of Hong Kong stocks, which has increased significantly compared with a few years ago. From the perspective of industry preference, southbound funds have preferred sectors such as central state-owned enterprises with high dividends since the beginning of this year. In fact, we have also seen that the growth of these sectors this year is very considerable. However, in some traditional large-cap blue-chip stocks, such as the Internet, the total holdings of southbound funds are still relatively low, and the long and short transactions of Hong Kong stocks are relatively frequent. The influence of southbound funds, which can only do long unilaterally, on such industries is currently relatively limited. However, quantitative changes lead to qualitative changes. With more stocks included in the Hong Kong Stock Connect, we believe that the influence of southbound funds on the overall Hong Kong stock market is expected to increase further."
Zhang Chi further stated, "In the second half of the year, as mentioned in the previous question, once the Fed cuts interest rates, it triggers a tightening of offshore US dollar liquidity. Even if southbound funds continue to flow in, the impact on the Hong Kong stock market will be relatively limited. Even though southbound funds have shown a net inflow trend into Hong Kong stocks every year since 2014, as of now, southbound funds hold about 12.6% of the total number of Hong Kong stocks and about 8.9% of the market value, and their pricing power may still be relatively low."
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