While Hong Kong stocks are still a staggering 42 per cent below their February 2021 peak, there has been a palpable shift in sentiment over the past month, with just over half the Hang Seng’s gains occurring since April 19. That global equities were down 3.4 per cent last month – the S&P 500 index had its worst month since September 2023 – makes Hong Kong’s rally all the more remarkable.
In a report on April 26, Bank of America said the outperformance of Chinese stocks partly stemmed from the “unwinding of the popular ‘long AI, long Japan, short China’ trade”. China “appears to be a hedge with cheap valuations, light positioning, and low correlation” with shifts in US monetary policy.
This suggests it is technical factors as opposed to underlying fundamentals that are driving the Hang Seng rally. Still, it has been a while since Hong Kong’s beaten-up stock market was in a sweet spot. Given that it currently stands less than 20 per cent above its level at the 1997 handover – while the S&P 500 has risen about 450 per cent since then – a significant improvement in sentiment is not to be sniffed at, regardless of its precise cause.
However, even if market technicals should not be underestimated, there are good reasons to question the durability of the rally. Betting on sustained gains in Hong Kong stocks means betting on a turnaround in China’s economy and markets. This is still a contrarian position given the deep-seated structural problems faced by China and the crisis in the country’s housing market.
It is worth bearing in mind that sharp rallies are often a feature of bear markets. The Hang Seng’s revival could well be a dead cat bounce. Yet the fact remains that few predicted such a sudden and sharp recovery in Hong Kong stocks, especially one partly driven by a reallocation of funds from some of the most popular markets such as Japan.
Hong Kong shares are cheap and are benefiting from investors’ less-pessimistic view of China. For the rally to continue, however, a more fundamental change in perceptions of China’s economy and markets is needed.
Nicholas Spiro is a partner at Lauressa Advisory
Read More:Opinion | Hong Kong’s stock market rebound: dead cat bounce or durable recovery?
2024-05-03 01:30:22