Date
18 October 2018
If things turn worse in the US-China trade row, the Hong Kong stock market could remain subdued for a longer period. Photo: Bloomberg
If things turn worse in the US-China trade row, the Hong Kong stock market could remain subdued for a longer period. Photo: Bloomberg

HK equities: How long will the weakness last?

The Hang Seng Index hit a record high of 33,484 points on January 29, and then tumbled 20 percent from its peak for the first time on September 7.

Technically speaking it has already entered the bear market territory.

Yet since breaking 26,787, the 20 percent downfall threshold, the index has been hovering around that level in following two weeks, dipping below it and then bouncing back several times.

As such, the debate as to whether the Hong Kong equity market has truly entered the bear phase is still ongoing.

What is the further downside room for the Hang Seng Index and how long will it take for the market to bottom out? Let’s review some statistics.

The Hang Seng Index has sent 27 death cross signals since 1970, a key bearish signal defined as the 50-day moving average dropping below the 250-day moving average.

Those cases can be roughly divided into two groups. In the first group, the market slumped 10 percent or more afterwards and in the other group, market fell less than 10 percent.

Combining with data like the market width and valuation factor, I believe this new round of market decline will fall into the first group.

The death cross appeared on July 31, when the market closed at 28,583 that day. A further 10 percent downside points to the level of 25,800.

If we use the median size of decline of death crosses in group one, which is 25 percent, then the downside could be as much as 21,600.

Historical data shows that it took an average of seven months for the Hang Seng Index to bottom out after it sent the first death cross signal. Therefore, we might see the market bottoming out in the first quarter of 2019.

Escalating US-China trade war has been a key factor behind the market weakness this time. If things turn worse on that front, Hong Kong equities could stay depressed for longer period and possibly experience deeper fall than what historical data suggests.

The full article appeared in the Hong Kong Economic Journal on Sept 20

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]

RC

Hong Kong Economic Journal chief economist and strategist

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