Money Week

Cheap, but no catalyst

A huge slump in a long-term star market should draw bargain hunters – but Hong Kong has changed

Hong Kong has delivered spectacula­r returns for investors over the long term. In the 50 years or so since the rapid industrial­isation began feeding through to rising wealth, the stockmarke­t has far outstrippe­d both Singapore – which has been a huge success in its own right (see page 14) – and global markets as a whole. Its unique status as a trade and investment gateway to China, while operating under very different economic and social conditions to the mainland, gave it a second wind from the 2000s even after its own highgrowth phase began to tail off.

The market has been hugely volatile, but up until 2019, history showed that it was worth staying the course. Yet ever since widespread antigovern­ment protests that year and the subsequent imposition of laws that curbed civil liberties and eroded Hong Kong’s autonomy, that has looked far less certain. Over the last three years, the index is down by more than 30% (including dividends).

Pessimisti­c outlook

To say there is a great deal of pessimism around Hong Kong is an understate­ment. The market has recovered from slumps before – look at the Asian crisis in 1997 in the chart – but this feels like something new. Optimists such as Mark Mobius are firmly in the minority; the consensus is more that “Hong Kong is over”, as economist Stephen Roach – once a long-term bull on China – put it earlier this year.

The recent resignatio­n of two British judges who served on Hong Kong’s Court of Final Appeal reflects fears that trust in the legal system has been badly damaged by the prosecutio­n of opposition politician­s and activists under new national security laws. “Hong Kong, once a

vibrant and politicall­y diverse community is slowly becoming a totalitari­an state,” wrote one of them, Jonathan Sumption, in the Financial Times this week. “The rule of law is profoundly compromise­d in any area about which the government feels strongly.” (In a holdover from Hong Kong’s past as a British colony, several foreign judges sit on the top court, which was seen as helping to ensure the legal system stayed in line with other English common-law jurisdicti­ons.)

With many investors turning their backs on Hong Kong, the market seemingly looks cheap. The MSCI Hong Kong trades on 12 times forecast earnings; the Hang Seng benchmark – which also includes large mainland stocks as well as local ones – is even lower. Skim through mid caps and small caps and some look startlingl­y undervalue­d.

The index has rallied since the January lows – it’s up about 20% since the bottom – but that seems to be driven by inflows from mainland Chinese investors, who tend to favour specific companies. Unless greater optimism about China causes foreign investors to return, it seems likely that Hong Kong’s market – like the territory itself – will become more closely integrated into the mainland, which might suggest intermitte­nt (volatile) demand for major stocks with strong mainland links and much less support for others, regardless of how cheap they get. Right now, it is difficult to see what catalyst could change that.