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Hong Kong rallies close to bull market territory

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Hong Kong’s benchmark stock index climbed as much as 2 per cent on Monday, extending a week-long rally and putting it on course to become the best-performing major index globally in April.

After a weak start to the year, the Hang Seng index entered a technical bull market during the day on Monday, touching a level 20 per cent above its January low, with an influx from international funds improving liquidity. The index closed 16 per cent above its January low and up more than 7 per cent this month.

Sentiment has shifted on Chinese equities, with foreign investors starting to chase lower-valued, high-dividend Hong Kong-listed shares. They have been shifting funds away from other Asia-Pacific markets such as Japan or India, where currencies are under pressure from a stronger dollar.

The rally comes as Hong Kong’s stock exchange is trying to revive its fortunes and attract foreign investors, with the Hang Seng index down more than 42 per cent since early 2021 and investors showing little appetite for initial public offerings.

Line chart of Hang Seng index showing Hong Kong shares plumb levels 20% above January low

“Things are changing,” said Alvin Cheung, associate director of Hong Kong-based Prudential Brokerage. “A relatively lower valuation . . . has become an attractive element when the other major markets are not rallying continuously.

“Institutional investors are reallocating their funds from other markets to Hong Kong at this point . . . and the momentum has been strong,” he added.

Property and finance stocks led gains in the broader market in Hong Kong on Monday. Sentiment was boosted by insurance group AIA, which reported a 27 per cent increase in new business value, a key indicator of its future profitability. Mainland Chinese shares also rose, with the benchmark CSI 300 index up 1.1 per cent.

Asian countries in recent weeks have been bracing for turbulence from a stronger US dollar, with the receding prospect of US interest rate cuts this year hitting the yen, renminbi and other regional currencies.

The yen has continued to record new 34-year lows against the dollar, plunging past the ¥160 level against the dollar on Monday before rebounding shortly afterwards.

“It is more about improvement in funding rather than fundamentals,” said Chen Guo, an analyst at China Securities. “The biggest downside for Hong Kong stocks in the second half of last year was the systematic foreign outflows to Japan. But recently, the share allocation in the Asia-Pacific region has shifted from Japan back to Hong Kong, greatly improving the liquidity of H shares [Hong Kong shares of mainland Chinese companies].”

“The currency peg in Hong Kong [with the US dollar] provides support not only for the Hong Kong dollar but also for market overall sentiment” in the face of a strong dollar, said Dickie Wong, executive director of research at Hong Kong-based Kingston Securities.

Investment from mainland China has increased significantly, according to Chen, driven by favourable government policies and the high dividends available from some Hong Kong shares. The China Securities Regulatory Commission announced plans this month to encourage major mainland Chinese enterprises to list in Hong Kong and expand the scope of products for the city’s Stock Connect scheme that links it with the mainland.

Traders noted a broader sense of optimism as earnings for companies with exposure to the mainland improved.

“It’s not that everyone is having stellar earnings off the bat, but you’re definitely seeing earnings come back,” one Hong Kong-based trader said, adding that there was more interest from European long-only and pension funds than from the US.

The recovery has also been supported by the Chinese economy’s better than expected first-quarter performance, consistent buying of mainland Chinese bank shares starting from the fourth quarter and recently announced policy initiatives targeting the equity markets, according to Goldman Sachs analysts.

However, some analysts said it was still too early to call this a turning point for Hong Kong. 

“Most of the funds are coming back to Hong Kong for the purpose of hedging, to avoid possible interest rate hikes from Bank of Japan and the US stock market turbulence,” said Kevin Liu, equity strategist at Chinese brokerage CICC. “Since the rally has a strong feature of shielding risks, it’s hard to judge its sustainability at this point.”

“I don’t see how it’s structurally feasible, I just see it as a bounce,” said another analyst who did not wish to be named. “Flow begets momentum but I just don’t know how long that lasts.”

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