24 February 2019
A small number of index heavyweights like Tencent and AIA contributed most of the Hang Seng index gain, indicating the market rally is far from broad-based. Photo:  Reuters
A small number of index heavyweights like Tencent and AIA contributed most of the Hang Seng index gain, indicating the market rally is far from broad-based. Photo: Reuters

HK equities: Recovering but far from full strength

On April 27, the Hang Seng Index hit 24,717 points, the highest level in two years, indicating Hong Kong equities continue to recover from the slump in 2015, when the Hong Kong market took a roller coaster ride following mainland equities.

Two years ago, Chinese equities surged on encouraging comments from Chinese officials and the state media.

China’s central bank governor Zhou Xiaochuan reportedly said “capital flows into the stock market is supportive to the real economy”. The state-run People’s Daily even claimed that “4,000 points [for the Shanghai Composite Index] is just the starting point of the bull market”.

As a result, the Shanghai market surged nearly 40 percent in less than a month.

Given that a lot of H shares traded in Hong Kong were trading at a much lower level than their mainland-listed A shares, the Hong Kong market surged along with mainland equities.

The Hang Seng Index soared above 28,000 in April 2015 from 23,000 points in mid-March that year. Daily market turnover topped HK$200 billion.

The bull market soon lost steam. As Chinese equities crumbled, the Hong Kong market also suffered a heavy sell-off. The Hang Seng Index plunged to around 18,000 points in February last year.

Two years on, the Hong Kong market has recovered quite a bit but mainland equities has shown few signs of revival.

The Hang Seng Index is about 13 percent lower than the peak seen two years ago but the Shanghai Composite Index remains 30 percent lower over the same period.

While Hong Kong equities have done much better, the recovery is less impressive when we take a closer look.

For instance, the daily market turnover of the Hong Kong market was only about HK$76 billion on April 27 when the index climbed to a two-year high, still way below turnover levels at more than HK$200 billion two years ago when the bull market was in full swing.

Also, the recent strong performance of the Hong Kong market is mainly underpinned by several heavyweights including Tencent (00700.HK) and AIA (01299.HK).

Between April 24 and 27, the Hang Seng Index rallied 2.7 percent; however, more than 800 stocks have actually posted losses in the period.

Tencent, which accounts for 10 percent of the Hang Seng Index weighting, has jumped 50 percent since April 27, 2015. That means Tencent alone contributed 1,400 points of gain to the index over the two-year period.

Another example is AIA, which has a weighting of 7.5 percent. It hit a record high of HK$54.50 on April 27.

Among the underperformers, Hong Kong Exchanges & Clearing (00388.HK) is a notable one. The counter is still trading at more than 30 percent below its historical high.

Some speculative plays are worse off. Solar energy firm Hanergy Thin Film Power Group (00566.HK), one of the most actively traded shares two years ago and once commanded a market value of over HK$300 billion, plummeted on an insider trading scandal in May 2015 and has been suspended since then.

A full recovery of Hong Kong equities will take more time, but inflows of funds from China under the stock connect schemes should keep the momentum.

This article appeared in the Hong Kong Economic Journal on April 28

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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