By now, everyone who has looked at the Hong Kong stock market should be aware that the Hong Kong market is in a severe bear market. The Hang Seng Tech (HSTech) index has been in a downtrend since it peaked in February 2021 at nearly 11,000 points and is currently sitting at around 3,500 points, just off its low which was close to 3,400 points. This is a nearly 70% decline!
It does not seem to stop declining and every time there’s a reason to cheer for a potential recovery, it eventually goes back on the downtrend track.
What happened to the Hang Seng Tech Index recently?
Looking at the daily chart below, after the HSTech hit a bottom in March, it went on a bull run, with the index increasing by more than 20% from the double bottom formed in Mid April and Early May. All was hopeful until the middle of July where it broke through the uptrend channel and has been on a downtrend since.
The index has since fallen below the double bottom and is on its way to the previous low formed in March.
These are a few main reasons why it happened:
1) High interest rate environment
The strong US economy has led to hawkish sentiments from the Federal Reserve and continued emphasis on tightening measures. Consequently, there is now a higher risk of a recession. This has caused the US indices to fall by nearly 20% since the recent highs in the middle of august.
As the saying goes – when the US sneezes, the world catches a cold. Many other stock markets including the HSTech has fallen by similar levels if not more.
2) Continued Chinese economic uncertainty from COVID lockdown policy
Although there has been signs of relaxation such as Hong Kong reducing its quarantine policy and speculation from President Xi appearing in public without a mask, the fact is that China is currently the only large country with a zero-COVID policy.
The Chinese economy has been weak as it has been affected by not only the zero-COVID policy but also the property sector crash and tech regulatory actions. As long as this policy remains, any attempt to resuscitate the economy will be lacklustre and investors will be wary of investing in China.
3) Renewed Russian Ukraine conflict and continued geopolitical tensions
Russia’s annexation of four regions of Ukraine has been viewed as a major escalation by NATO and its allies. As China continues to be viewed as an ally to Russia, this has kept geopolitical tensions high and impacted the HSTech index.
These three key issues will continue to haunt HSTech.
What to expect in the short term (less than 3 months)
1) Interest rate environment remains high
As the various Fed officials have reiterated their stance to combat inflation and some even mention that it is unlikely for a rate cut in 2023, It is most probable that we will continue to see hikes for the rest of this year until inflation ticks down meaningfully over a few months.
2) Continued Chinese economic uncertainty from COVID lockdown policy
While there are hopes of relaxation of COVID policy after the 20th Chinese Communist Party(CCP) congress on 16th October in view of policy clarity and policy progress, readers should not be overly hopeful of a sudden and significant switch. The CCP has maintained its stance even in the current economic situation as it continues to rely on its domestic market.
3) Renewed Russian Ukraine conflict and continued geopolitical tensions
The most significant uncertainty comes from this point as it is anyone’s guess on Russia’s next steps. When it was hopeful that Russia would withdraw its troops, it instead took a step to annex the four regions instead.
Putin has also warned the West he was not bluffing when he said he’d be ready to use nuclear weapons to defend Russia. Some analysts say Putin is bluffing but the US is taking Putin seriously and this would escalate matters.
What to expect in the medium term (more than 3 months and less than 1 year)
Looking at the weekly chart, we can see that the HSTech broke down from the uptrend channel in Jul 2022 and has been in an downtrend channel since. It was also unable to break out of the first Fibonacci support level of 5.2k.
We will need to see HSTech index consolidate at these levels before meaningfully move up above the 20day moving average of around 4300 points and form a double bottom and another uptrend line.
1) High interest rate environment
There are hopes that once inflation ticks down for a couple of quarters that the Fed will change its tone and look towards reducing interest rates. The market would then take this very positively.
2) Continued Chinese economic uncertainty from COVID lockdown policy
There are also hopes that China may open before the next Chinese New Year and gradual reopening with clarity of policies in place would mean that investors can once again be hopeful
3) Renewed Russian Ukraine conflict and continued geopolitical tensions
Should Russia cease escalation, this may go down the route of the Crimea annexation and gradually reduce impact on stock and commodity prices
How about the longer term? (more than 1 year)
Some analysts believe there is now a structural shift in the macroeconomic environment which has been exacerbated by geopolitical issues and could mark an end to globalization.
While the overall environment is fraught with uncertainty, this could all change very quickly.
1) High interest rate environment
According to the Fed’s median forecast, the Fed will raise median interest rates as high as 4.4% in 2022 and 4.6% in 2023 before the Fed stops its fight against soaring inflation. The median interest rates will then taper down to 3.9% in 2024 and 2.9% in 2025.
Should inflation decline quicker and the economy fall into a deeper than expected recession, the projection expectations could very quickly be tapered down and this will be viewed as bullish for stocks, especially tech companies.
2) Continued Chinese economic uncertainty from COVID lockdown policy
There is a significant cost to China’s continued isolation from the rest of the world. Few analysts expect the policy to continue past 2023. China intends to invest significant amounts on infrastructure in 2022 and 2023 to shore up its economy but for China to maintain its presence and position in the world, many analysts believe that opening up is a matter of eventuality
3) Renewed Russian Ukraine conflict and continued geopolitical tensions
Although the expectation is for the tensions to taper down over time, merely referencing to the previous annexation may not be a good indication as US’s approach to geopolitical situations have shifted significantly. Many countries globally have imposed significant sanctions on Russia and with China viewed as an ally to Russia, the risk premium for investing in China has increased.
Since the commencement of trade tariffs in 2018, US has been on a direct confrontation path with China. In addition, US has recently imposed restrictions such as the limits on exports of Chip technology to China to combat against China’s strength. Investors are now more wary of investing in certain industries in China due to such prevailing risks.
HSTech overall outlook
Due to the weak prevailing Chinese economy, many sectors are seeing negative earnings per share (EPS) trends.
The HSTech which is a representation of the Chinese tech sector is one of few sectors with forecasts of positive EPS reversions due to the easing regulatory crackdown and support from government policies.
Investors will do well to look out for signs of bottoming or even recovering growth in both the company’s financials as well as outlook being communicated.
Should you look at the HSTech for opportunities?
The Hang Seng Tech index has been in a down trend for more than 1.5 years and has seen many glimmers of hope extinguished. The issues at hand have evolved and also grown from just regulatory to include geopolitical and macroeconomic issues, exacerbated by the perennial covid zero policy.
We have provided short, medium and long term views about the potential recovery opportunities for the HSTech based on the 3 major issues at hand coupled with technical analyses.
Although there are downside risks in the short term, the medium term looks much more optimistic with the short term risks dissipating. The long outlook is of course much more uncertain, but there are expectations of a lower interest rate environment and China’s reopening underpinning growth.
Investors should also look out for fundamental shifts from declines to recovering growth in the HSTech company’s corporate earnings and outlook.
