Hong Kong stocks poised to rebound as monetary easing boosts China’s economic recovery, says Hang Seng Qianhai Fund Management

Hong Kong stocks are likely to rebound in the second half, as the market is ‘too pessimistic’, says Hang Seng Qianhai Fund Management
More supportive fiscal and monetary policies expected to address China’s uneven recovery, says the fund and HSBC Global Private Banking

Hong Kong stock market

Iris Ouyangin Shenzhen

Published: 7:00am, 1 Jun 2023

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Hong Kong stocks are likely to rebound from heavy sell-offs in the second half of the year as a potential easing of monetary policy boosts China’s economic recovery, according to Hang Seng Qianhai Fund Management.

The fund, the first Hong Kong capital-controlled mutual fund manager in mainland China, with assets under management of 20 billion yuan (US$2.8 billion), believes the city’s benchmark Hang Seng Index is about to bottom out and sees current market sentiment as “too pessimistic.”

“The economy has cycles, and based on previous experience China’s economy will recover in the second half,” said Watson Qi, head of equity investment for the fund based in Qianhai, Shenzhen, in an interview. “The market is approaching, or closer to, the bottom now.”

Concerns about China’s economy have dragged Hong Kong stocks into a bear market. Wednesday’s official manufacturing purchasing managers’ index (PMI) data further dented confidence in the so-called China reopening trade which had fuelled a rally after China lifted its Covid-19 restrictions.

Global investors are on track to record net sales of their Chinese onshore equities for a second consecutive month as the yuan fell to a key threshold of 7.1 against the US dollar.

A spike in US-China geopolitical tensions, weak external demand and uncertainties around the US debt ceiling all underpinned the sell-off.

The Qianhai fund is betting on a longer-term recovery of Chinese markets after heavy sell-offs. It expects to see support coming from an easing of policies by Beijing and overseas central banks to boost economic growth, an improvement in overseas monetary policies and liquidity.

“We foresee that China’s economy will rebound and stabilise, in the medium term it’ll be a mild recovery,” said Xing Cheng, the fund’s Hong Kong equity portfolio manager, at a market outlook briefing on Wednesday. “It will reflect on the earnings side of Hong Kong-listed companies, whose earnings could record a 10 per cent to 12 per cent year-on-year gain.”

The amount of short-selling as a proportion of total turnover of shares on Hong Kong’s main board has risen 3.2 percentage points this month to 19 per cent on Tuesday, he said.

“When the market short-selling proportion exceeds 15 per cent, usually it means that pessimistic expectations are sufficiently reflected, and there is limited room to drop further.”

The Hang Seng Index finished Wednesday 19.6 per cent down from a January 27 high, just shy of the 20 per cent threshold for bear-market status. The Hang Seng China Enterprises Index, a gauge of Chinese companies listed in Hong Kong, slipped into a bear market.

The fund’s views echoed those of other optimists in the market, such as HSBC Global Private Banking, which said it had an “overweight position” on mainland China and Hong Kong, along with equities in India and Indonesia.

“From an earnings growth perspective, Asean, China and Indian equity markets are forecast to deliver the strongest growth potential in 2023, outperforming their developed and emerging market peers,” said Fan Cheuk Wan, chief investment officer, Asia, global private banking and wealth, HSBC, in a report on Tuesday.

“However, China and Asian equity markets are now trading at a substantial discount to their global peers despite their much stronger earnings growth prospect.”

Both the Qianhai fund and HSBC Global Private Banking teams anticipate that an uneven recovery in China will propel the government to announce more proactive fiscal stimulus and targeted monetary easing in the coming months.

HSBC’s team said the People’s Bank of China is likely to roll out another 25 basis-point cut in the reserve requirement ratio in the second quarter and a potential five basis-point reduction in the Loan Prime Rate later this year.