The Hang Seng Index has risen nearly 20 percent this year if the dividends are also factored in. The question is, does it have further upside?
We can try to answer the question by looking at the earnings trend.
The benchmark index’s 12-month EPS has rebounded 4.3 percent year-to-date, which suggests the falling earnings of the index constituents have shown signs of bottoming out.
Nevertheless, the index’s EPS is still more than 20 percent below the 2015 peak. Will earnings keep improving?
There are some clues we can glean from profit alerts filed with the stock exchange.
Share price performance is closely related to earnings growth. And profit alert is a leading indicator of an earnings trend.
In view of the regulatory requirements, negative profit alerts typically outnumber the positive ones.
Recently, the ratio of negative profit alerts has tumbled to the lowest level since 2010, indicating that the earnings trend is improving and more market upside may be in store.
Statistically, if the moving average of the difference between the number of positive alerts and negative alerts approaches zero, the Hang Seng Index is likely to reach 30,000 points or beyond.
Generally speaking, profit alerts are a leading indicator of the overall earnings trend. In view of the improvements seen lately, we can expect more upside.
My prediction is the Hang Seng Index can surpass the 30,000 mark by the end of this year or early next year.
This article appeared in the Hong Kong Economic Journal on June 22
Translation by Julie Zhu
[Chinese version 中文版]
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