Why are Hong Kong stocks so cheap
Just as the world is trying to put the worst of Covid behind, Hang Seng Index (HSI), the barometer for the Hong Kong stock market, has gone below its Covid low in March 2022.
In fact, it is currently 15% below the Covid low.
You would have lost money if you have held the Tracker Fund of Hong Kong (which tracks the performance of HSI) for 10 years. Not many investors can still keep the faith after so long.
According to Bloomberg, HSI is trading at a PE of 6.7. The entire index is like a bunch of value stocks - indices usually trade in the teens or even in the 20s.
Correspondingly, Straits Times Index (STI)'s PE of 12.2 is almost 2 times of HSI's.
Even if you ask a technical analyst, he will say that HSI has broken every possible long term trend lines and support levels.
HSI is also one of the worst performing indices this year, down 24% year-to-date.
What is going on with Hong Kong stocks? Why are they valued so lowly?
#1 Strengthening USD
The USD has been strengthening as the Fed has been raising interest rates. This makes USD and its yield-bearing investments more attractive.
HKD is pegged to USD and the Hong Kong Monetary Authority (HKMA) has been raising interest rates and buying HKD to keep up.
Although the HKMA has been able to defend the peg in the past, the fear of breaking the peg resurfaces from time to time.
This lowers investors' confidence and some might have pulled out their funds from Hong Kong.
#2 Strict Covid policy
Hong Kong is still one of the few places that require travellers to quarantine. It has been going on for 2.5 years. It is expected to be lifted today though.
The prolonged restrictions has resulted Hong Kong to be in a technical recession, after suffering two consecutive quarters of negative GDP growth.
It is projected to end 2022 with a GDP growth between -0.5% and 0.5%. In contrast, Singapore is forecasting a GDP growth of 3 to 4%.
#3 Major HSI overhaul
In 2020, HSI went through a revamp. With closer connection to mainland China as well as the burgeoning tech trend, HSI began to include China's tech giants that are listed in Hong Kong - Alibaba, Tencent, JD.com, Meituan etc.
It was ill-timed as the China began its regulatory crackdown on these powerful tech companies not long after, which caused their share prices to spiral down, dragging the index with them.
The recovery of these tech stocks are not in sight yet and they represent 30% weight in the HSI today.
There are probably more reasons but we think these are the 3 major ones.
It seems like a perfect storm has struck Hong Kong - it is taking on the problems in China and US alike. The feng shui hasn't been good.
The stocks are very cheap but investors are even more worried about their ability to recover. Few buyers and more sellers don't bode well for stock prices.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
Tks for sharing.