Hong Kong’s Hang Seng Index experienced a surge of over 7% in April, making it the best-performing major index in the world. This strong rebound follows years of heavy losses and a weak start to 2024, with global investors expressing skepticism about China’s economic future and concerns about geopolitical tensions with the United States. However, factors such as an improving economic landscape in China, cheaper valuations, and mainland Chinese investors putting money into Hong Kong to protect their portfolios from a weakening Chinese currency have contributed to the market’s resurgence.
The valuation of Hong Kong stocks has become more attractive relative to the rest of the Asian region following a pullback last year, signaling a shift in investors’ sentiments as Chinese economic data turned more positive. Recent reports hinting at a “real solution” for the crisis-ridden property sector in China have also boosted investor confidence. Policy measures, such as lifting restrictions on homebuyers and providing support for developers’ funding needs, indicate the government’s commitment to stabilizing this critical sector in 2024.
There are signs that China’s economy may be rebounding, with manufacturing activity growing at the fastest pace in 14 months in April. The Caixin/S&P Global manufacturing PMI rose to 51.4 in April, marking the sixth consecutive month of expansion, fueled by increasing new export orders due to improving global demand. China’s GDP grew by 5.3% in the first quarter, propelled by robust growth in high-tech manufacturing, and PMIs indicate improving momentum since the start of the year due to fiscal and monetary stimulus.
Chinese equities listed in Hong Kong have become more attractive, especially when compared to the booming Indian markets. Investors are starting to view India’s valuation as ‘expensive,’ leading to outflows from India to China equities. Despite geopolitical tensions and concerns surrounding potential fallout from the US elections, global investors may increase their exposure to Chinese markets due to attractive valuations and the fear of missing out on the current rally. This could lead to a global rotation of funds into Chinese equities, further sustaining the upward trajectory of the market.
Hong Kong has witnessed strong inflows of money from mainland China, where investors are worried about further depreciation of the Chinese currency. The yuan has lost 4% of its value against the US dollar in the past year, prompting mainland Chinese investors to diversify their holdings to non-RMB denominated assets like Hong Kong-listed stocks. The People’s Bank of China has cut rates multiple times and pledged to maintain ample liquidity this year to fight deflation, leading to increased investment from mainland China into Hong Kong.
Stock exchange data shows that southbound investors (investment from mainland China into Hong Kong) have purchased nearly $20 billion of Hong Kong-listed stocks in March and the first three weeks of April on a net basis. Mainland Chinese investors may prefer to diversify their holdings to non-RMB denominated assets during periods of RMB depreciation, and analysts suggest that this depreciation pressure on the yuan could persist throughout the year.Overall, the market’s rebound in Hong Kong is attributed to improving economic conditions in China, cheaper valuations, and an influx of mainland Chinese investors seeking to protect their portfolios from a weakening Chinese currency. The prospect of a solution for the property sector crisis in China and signs of economic recovery indicate a positive outlook for the market.
