18 February 2019
China's economic slowdown and US Fed tightening will be among the factors weighing on Hong Kong stocks next year. Photo: Reuters
China's economic slowdown and US Fed tightening will be among the factors weighing on Hong Kong stocks next year. Photo: Reuters

Markets face a bumpy ride next year

Equity markets have been severely oversold in recent months in many parts of the world.

Among the 48 major global stock indices, only three are above their 50-day and 200-day averages, according to the global market breadth index we’ve compiled.

Stocks usually see a good rebound when the index drops to such oversold level. But right now the prospects are uncertain as the macro environment is gloomy.

Equities are likely to struggle further in the first half of 2016, unless there is a major shift such as a central bank policy that might reverse the tight liquidity and strong US dollar.

As I’ve noted last week, both equity and housing prices may follow a “V-shape” pattern.

Hong Kong housing prices could slide 10-15 percent

The Fed liftoff has limited impact on the housing market as the central bank is expected to take a cautious and gradual approach in its tightening.

That said, the rate hike may weigh on the stock market and enhance the volatility, which would further reduce confidence in the housing market.

The Hong Kong housing market confidence index, compiled by Department of Investment Analysis at HKEJ and Wisers, already slid to the record low since 2010. It reflects the extreme pessimism on the housing market outlook. That’s why the secondary market has witnessed some transactions with sharp discounts.

Housing prices are likely to drop by 10 to 15 percent, according to several gauges such as primary market deals, housing market technical breadth and US dollar index. But the slide may come to an end if the US launches another QE as expected later next year.

The US market might suffer a fall of more than 15 percent

Despite such slide, the market may resume a rally in the second half of next year. Apart from Nasdaq index, most US market indices have been flat so far this year. 

The S&P 500 index may tumble over 15 percent to below 1,800 points next year. The US market is affected by various positive and negative factors. Corporate earnings growth overall has posted the biggest drop since the financial crisis.

Dollar strength has weakened the competitiveness of American firms in the export market. Meanwhile, rising interest rates would also pose other challenges.

The Fed might conduct another round of money-printing in late 2016. If that happens, the US market may stage a “V-shape” rebound.

The Hang Seng Index might tumble below 19,000 points

China’s economy is set to slow further next year, while other emerging markets also continue to suffer. Meanwhile, the US market lacks upward catalyst in the short term.

All these factors will weigh on the Hong Kong market next year.

Currently, the Cyclically Adjusted PE (CAPE) multiple of Hong Kong market is only 9.8. There is limited downside risk. However, the market could face heavy pressure if the Chinese yuan devalues sharply next year.

Technical analysis shows that the Hang Seng Index could tumble to a low around 18,400 points.

2016 looks set to be a challenging year. Investors must brace for more market volatility going forward.

This article appeared in the Hong Kong Economic Journal on Dec. 24.

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal chief economist and strategist

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