Hong Kong stocks slide after entering bull market while Chinese markets gain on upbeat view of economic recovery

Martin Choi
·6 min read

Hong Kong stocks slipped on profit taking after Monday’s huge surge that propelled the market into bull territory, while China markets continued their run-up on as traders bet on signs of steady economic recovery.

The Hang Seng Index rose as much as 1.7 per cent on Tuesday, but then reversed sharply into choppy trading for a 1.4 per cent loss. The benchmark had risen a total of 8.4 per cent over the past four sessions, leading the bulls to wrest control from the bears for the first time since late March.

“The Hong Kong market has fully digested the short-term impact from the national security law, and the conversation by Carrie Lam and other officials are within expectations,” said Alan Li, portfolio manager at Atta Capital. “The Hang Seng Index and some stocks overshot too much yesterday, and a technical adjustment is needed.” As long as key opinion influencers in China keep their bullish views, “the [Hong Kong] market is likely to go further in short term.”

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Mainland investors continued to snap up Hong Kong stocks, with a net HK$6.1 billion in buying that accounted for a quarter of all market turnover in trading value, according to AA Stocks data. That was down sharply from Monday’s net southbound inflow through the Stock Connect totalling about HK$11.2 billion. On each of the past seven sessions, mainland trades have accounted for more that 20 per cent of market turnover by value.

Hong Kong’s monetary authority stepped in Monday and Tuesday to sell HK$7.17 billion of local dollars to weaken the currency and bring it back within its trading band, as hot money continues to flow into the city, defying speculation of capital flight over the controversial national security law.

Meanwhile, the Shanghai Composite Index trimmed its gains to close ahead by 0.4 per cent, led by consumer staples, health care, and information technology stocks. The advance came after its 5.7 per cent advance Monday – its biggest jump in five years, as bullish sentiment takes firm control. The benchmark has advanced for six straight sessions.

In Hong Kong, property companies retreated, while consumer staples and consumer discretionary stocks advanced.

Geely Automobile led blue chip gains, with a 3.3 per cent gain. Earlier, however, it shot up as much as much as 15.2 per cent after reporting its June sales rose 21 per cent, a contrast to earlier vehicle sales clobbered by the coronavirus. Among analysts tracked by Bloomberg, the stock has 34 buys, five holds and two sell ratings.

China Overseas Land and Investment (COLI) fell 3.5 per cent, after rising three sessions over which it gained about 15 per cent. It was among Chinese developers getting a boost from better-than-expected home sales in June.

Meanwhile, Semiconductor Manufacturing International Corp., China’s top chip maker that has been soaring over its A-share listing plans in Shanghai, rose sharply by as much as 11 per cent before dropping by as much as 10.2 per cent. It ended the day with an 8.9 per cent loss, and was the most heavily traded stock in Hong Kong, with turnover of HK$13.2 billion.

Haidilao hotpot chain gained 3.4 per cent after it filed a profit warning with the exchange that was not as bad as some analysts expected.

The hotpot chain said it expects to see a 20 per cent decrease in revenue and a net loss for the first half of the year after the coronavirus forced it to suspend operations of all mainland stores beginning January 26. It began reopening stores on March 12. But Jefferies analysts Anne Ling and Kerith Chen, who have a hold rating on the stock, said the fall was actually less than their expected 30 per cent decline.

City chief executive Carrie Lam Cheng Yuet-ngor, in her regularly scheduled weekly news briefing Tuesday, pointed to the recent robust gains in Hong Kong stocks to counter critics who say the controversial new national security law means the death of the “one country, two systems” era. “Surely this is not doom and gloom for Hong Kong,” she said, specifically pointing to the recent surging market. She said the law will restore stability and only impact “radicals” who should expect “very serious” consequence for violating the “red line” law.

On the mainland, liquor king Kweichow Moutai continued to rise, shooting up 5.5 per cent, after reaching 1,600 yuan for the first time ever Monday. It closed at a jaw-dropping 1,688 yuan.

The rapid rise of China’s top benchmarks has led to some worries about a possible bubble.

“It remains to be seen whether we see another repeat of the euphoria of the 2015 Chinese stock market rally, but it certainly seems like [retail investors are] happy to buy into it,” said Stephen Innes, chief global markets strategist at AxiCorp.

“China's army of retail investors seem to be perfectly able to look through the worrying Western media headlines of another global coronavirus record. Instead, they are listening to the enthusiastic chorus from the nation's influential state media, which are universally singing bullish from the same song page.

“And reading between the lines, [we can] finally expect that People’s Bank of China (PBoC) policy deluge the market has been hoping,” Innes added.

In the summer of 2015, a bubble formed as the Shanghai Composite Index shot up nearly 5,200 in June. That is far higher than it is trading today, and some reforms have been instituted to try to avoid a repeat.

Data from Bloomberg showed that there were key differences between the surge in Chinese stocks now and the bubble in 2015, which was fuelled by a surge in margin debt.

As of July 6, margin debt accounted for about 2 per cent of the market cap of China’s outstanding shares, compared to a peak of 4.5 per cent in 2015.

In terms of valuation, the market cap of Chinese stocks accounted for roughly 50 per cent of GDP, compared with a high of 71 per cent in 2015.

The median price to forward earnings of the members in the Shanghai Composite was also about 19 times, compared with 41 in June 2015.

Elsewhere in Asia, Japan’s Nikkei 225 and South Korea’s Kospi showed small declines.

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