1. Hong Kong stocks gave an unpleasant surprise on Mon (7 Mar) with the Hang Seng Index (HSI) going down by 4%. This is worse than the Covid low in 2020.
2. An investor who has bought into the HSI ETF could have believed it would turn out well as long as he has held it long enough. 5 years have passed and yet he would be looking at a loss, wondering how long should long-term be. The Asian markets’ performances have been testing investors’ patience.
3. What are some of the reasons for this poor performance?
4. First of all, Asian stocks which were predominantly value stocks, started to underperform in a low interest rate environment since a few years ago. In contrast, the growth stocks in the US staged one of the strongest bull runs in history before the bear turned up.
5. China has her fair share of growth stocks but they were not included in the HSI until 2020. The previous HSI consisted of mainly finance and real estate stocks which were laggards in those years.
6. The second reason was due to the social unrest – Hong Kong saw the largest protests and demonstrations in 2019 against a new extradition bill. Properties were damaged and commerce was affected. Consumer spending declined and Hong Kong slipped into a recession.
7. The third reason was a universal one – Covid. Hong Kong did relatively well in controlling the initial wave of Covid but the global restriction on travelling and business activities hurt her too. Hong Kong is still dealing with an outbreak of cases now.
8. The fourth reason is that the addition of the China tech stocks to HSI could not be more ill-timed. China started her regulatory actions in end-2020 and since then, the Chinese tech stocks have tumbled and have yet to recover after a year has passed. HSI contains China bellwether tech stocks such as Tencent, Alibaba and Meituan, and it got dragged down as a result.
9. The fifth reason is also a universal one – Russia-Ukraine conflict. The war is still ongoing and the commodity prices have been shooting up. This is bad for China since it is the world’s factory and the biggest consumer of electricity. Politically, the US is pressuring China to take a stand on the issue and some fear that sanctions may be applied to China should she back Russia. Hong Kong is part of China and inevitably she takes a hit too.
10. It seems like Hong Kong’s fengshui hasn’t been auspicious in the past few years and looking at the bad events unfolding one after another, it is hard for any investor to have the confidence that good things will come around soon.
11. But there are indeed positive things to look at – Greater Bay Area is a promising development whereby the Pearl River Delta cities will merge to form a metropolitan region. It will be a big contributor to China’s economy – about 12% of China’s GDP. Hong Kong being a conduit between China and the world, will continue to prosper as a crucial financial centre in the region.
12. Despite all the bad things that happened, Hong Kong’s financial standing remains strong – her foreign reserves is among the top 10 in the world. Overcoming more bad luck, if needed, shouldn’t be much of a problem.
13. Investors are probably disheartened which makes it hard for them to see anything positive in the horizon. The bearishness is overwhelming and it is likely that HSI can go down further in the short term.
14. What the market has taught us in the past one year is that what is low can go lower, and it can stay low longer than you think possible (reference to China stocks, US high growth tech stocks and cryptos).
15. One way is to wait for a rebound before entering to avoid catching a falling knife. It is okay not to pick a bottom and give up some profits in exchange for a rebound with a higher probability.
