The Hang Seng Index has tumbled below the 250-day moving average and hit a year’s low of 28,342 points.
The index has lost over 15 percent from its peak level so far.
Currently, the Hong Kong market is affected by two opposite forces. The most powerful negative factor is rising concern about the escalating US-China trade dispute and the strong US dollar.
On the positive side, earnings of Hong Kong-listed corporates remain strong, and their valuations are still at attractive levels.
I believe the United States’ long-standing trade deficit is a structural issue, resulting from high labor/operating costs, low savings rate and consumerism. In fact, the US trade deficit represented less than 3 percent of its GDP last year; it should not be such a big issue.
But if other considerations such as national security are involved, the risk of a trade war will continue to dampen the Hong Kong equity market.
A clearer trend should emerge in the next quarter before the US mid-term elections in November. The following quarter will be critical.
As the dollar started to regain momentum in the middle of April, concerns grew over how a strong greenback and rising US interest rates would increase the debt burden of emerging markets.
Global investors have withdrawn US$8 billion from emerging markets over the past 10 weeks as of June 22. Such a pattern of fund flow, if it continued, would also weigh on the Hong Kong market.
According to the latest data, companies’ earnings are robust and their valuations are extremely cheap. The forward P/E ratio of Hang Seng index is around 11.3 times.
However, corporate earnings are not a leading indicator of share prices, given that results have some time delay.
Also, the renminbi has started to weaken recently as US dollar regains strength amid the rising trade conflict. The offshore exchange rate has risen above 6.6 against the dollar, the highest since the end of last year.
The weaker yuan will also affect the bottom line of many Hong Kong-listed companies, which generate most of their revenue from mainland China.
South Korean exports are often referred to as the economic canary in the coal mine. Both South Korean exports and China’s Li Keqiang index (based on railway cargo volume, power consumption and bank loans) have started to fall back since late last year, indicating rising risk of a global economic slowdown later this year.
The full article appeared in the Hong Kong Economic Journal on June 28
Translation by Julie Zhu
[Chinese version 中文版]
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