Hong Kong stocks look for earnings boost, mainland China tonic to overcome fatigue after world-beating run

Zhang Shidong
·5-min read

Hong Kong markets suffered their biggest slide in eight weeks on Friday, the first sign of fatigue during the best start to a year since 1985. Investors, though, will not run out of reasons to remain upbeat in the near term.

Unprecedented inflows from Chinese funds, progress in vaccination plans, and the prospect of better US-China ties are among key factors driving the new-year boom. The Hang Seng Index’s 8.1 per cent jump this month to the highest in 20 months ranked it among the top three major-market performers. In the process, Hong Kong eclipsed Japan as the third largest equity market by capitalisation.

An imminent rebound in corporate earnings beckons, according to HSBC Jintrust Fund Management, after China’s economy returned to a pre-pandemic growth rate of more than 6 per cent last quarter.

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“We will probably see a turning point in earnings for Hong Kong-listed companies in their fourth-quarter reports,” said Cheng Yu, its Shanghai-based fund manager who invests in Hong Kong shares through the Stock Connect programme. “That’s the biggest underpinning of fundamentals.”

The 52 members of the Hang Seng Index will probably report a 26 per cent increase in earnings this year on average, versus an almost 30 per cent decline in 2020, according to consensus estimates of analysts polled by Bloomberg. The members have a combined HK$11.53 trillion (US$1.49 trillion) of market capitalisation.

That recovery could in turn retain Hong Kong’s stock market appeal against its major global peers. While not as cheap as the 8.6 times earnings multiple in 2020, the local market is still the least expensive globally at 13.2 times esimated earnings, Bloomberg data shows.

That compares with 23.2 times for the S&P 500 Index, while European stocks are valued at 18.2 times. China’s A shares trade at about a 35 per cent premium over Hong Kong stocks on average, according to a gauge tracking the price gap between the two markets.

As a result, Chinese funds have piled into the Hong Kong stock market at an unprecedented pace. They have ploughed in HK$231 billion in net purchases through the Stock Connect scheme this month, or more than a third of the amount they invested in one quarter last year.

“Most investment funds raised in onshore China target primarily onshore stocks, but we are seeing more new funds put Stock Connect in their prospectus to take advantage of the relatively low valuations,” Hyde Chen, an analyst at the chief investment office of UBS Global Wealth Management said in a report on January 21.

WeChat operator Tencent Holdings attracted HK$48.6 billion of net inflows this year through January 19, according to data from China International Capital Corp (CICC). The social media giant has risen 23 per cent this month, taking its market cap to US$855.2 billion as the world’s sixth most valuable company.

China Mobile and oil producer CNOOC, which were rattled by the US investment ban and index deletions, ranked second and third favourite, luring HK$39.2 billion and HK$13.6 billion of inflows respectively. Semiconductor International Manufacturing Corp and Meituan were also key beneficiaries.

CICC, the nation’s biggest investment bank, has estimated annual inflows of as much as 600 billion yuan (US$92.8 billion) in the coming years.

The roll-out of Covid-19 vaccines and the start of the Biden presidency have also contributed to the risk-on mode. That outlook may offer the market some stability and predictability, after the turmoil of sanctions in the final weeks of the Trump administration.

Businesspeople in China’s manufacturing powerhouses believe the nation’s economic and technological development could leap forward in the coming years because US President Joe Biden is likely to take a less confrontational stance toward the country.

“I’m optimistic that a Biden administration will find more avenues to cooperate with China, which could be reason enough for investors to lower the political risk premium, especially in markets such as Hong Kong,” said David Chao, a strategist at Invesco in Hong Kong.

Stephen Schwarzman, the chief executive officer of private equity giant Blackstone Group, said there will probably be a “softer tone” between Washington and Beijing following the inauguration of Biden.

“China and the US comprise somewhere between 35 and 40 per cent of the entire world’s economy,” he said during the Asian Financial Forum last week. “To not have these two countries working in a cooperative fashion seems exceptionally odd and unproductive for the citizens of both of their countries.”

Chinese companies battered by US sanctions, and major dual-listed companies with considerable price gaps should be high on the radar, according to Shenwan Hongyuan Group. Cyclical stocks riding on economic recovery, such as chemical and commodity producers, should also gain favour, it added.

“You cannot ignore the strategy of southbound investment,” said Chen Xianshun, a strategist at Guotai Junan Securities. “That’s an outcome of both capital spillover and valuation comparison.”

Additional reporting by Chad Bray

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