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Asia Perspectives - Hong Kong equities: Headwinds remain, but with pockets of opportunities

Regional Outlook
Asia Perspectives
Asia
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Hong Kong Property
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Asia Perspectives - Hong Kong equities: Headwinds remain, but with pockets of opportunities

Oct 3, 2023

  • The performance of Hong Kong domestic equities has been muted year-to-date, with the MSCI Hong Kong Index down 21 per cent so far this year. Despite August tourist numbers having recovered back to 75 per cent of pre-COVID levels, Hong Kong equities performance since the reopening have been lukewarm, as investors remain concerned on the international tourist arrivals and the structural change that the mainland China tourists from over the border are spending less
  • The Hong Kong property sector has been a negative drag. Amid weaker-than expected economic recovery and housing market demand, the increases in mortgage rates, as well as our expectation for developers to aggressively cut prices for new project launches to boost volumes, we expect Hong Kong residential price to be flat in 2023 and decline 5 per cent in H1 2024 before the market starts to stabilise
  • While overall valuations remain undemanding and there are opportunities within the service consumption and travel-related sectors, we stay neutral on Hong Kong equities as we expect the current two-way volatility to persist in the near-term
  • Mainland China’s service consumption sector remains a bright spot in the economy, and we expect strong tourism activity during the upcoming National Day holidays, as we note solid demand in railway, domestic passenger flights, as well as hotel and travel bookings. As such, we see tactical opportunities in sectors such as Macau gaming, airlines, travel, and Hong Kong retail / consumer discretionary. We also think financial services and insurance could benefit
  • Despite trading at a massive valuation discount against its global and regional peers, we believe China and Hong Kong corporate earnings feasibility could see risk in some segments amid slowing economic and business activities. MSCI Hong Kong is currently trading at ~12x forward Price-to-Earnings ratio versus it’s 5-year average of 15x, and could likely to remain at low level given a weak earnings outlook. This is also evident from consensus earnings downgrades from MSCI China and MSCI Hong Kong index which have resulted in lower 2023 growth forecast of 14 per cent and 9 per cent respectively for mainland China and Hong Kong markets, down from 26 per cent and 13 per cent seen in June. Within Asian equity markets, we continue to prefer India and Indonesia

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