- Hong Kong, one of Asia’s most prominent financial centre, has been embattled with waves of protests and public demonstrations in the past three month.
- While the protests remain the biggest drag on sentiment, we believe their impact on Hong Kong’s economy and its underlying corporate earnings are fairly limited. Current weakness in Hong Kong’s equities are better explained by the soft macroeconomic conditions within the Greater China region, evident via a moderating GDP growth.
- Across this year, China has started to ramp up efforts in boosting liquidity, retail consumption and industrial output. Looking ahead, we expect to see signs of improvement in economic data for the Greater China region in the next few quarters, which in turn will progressively lend support to greater optimism ahead.
- We think investors’ concerns for the current political unrest and its impact on Hong Kong equities are overblown. The combination of an attractive valuation (currently near its historical low), easing trade tensions and stimulus measure from Beijing will help lift the Hang Seng Index (HSI).
- The risk-reward ratio of an investment in Hong Kong stocks is currently skewed towards the upside, with HSI presenting potential upsides of about 22% and 31% by end-2020 and end-2021 respectively.
- Thus, we maintain our star ratings of 4.5 stars “Very Attractive” rating for Hong Kong equity market.
Political uncertainty tainted macro outlook
(i) A dampening of consumer confidence and thus weakening domestic demand which is reflected by moderating retail sales (Chart 1);
(ii) Decline in business investments as companies lose confidence in Hong Kong’s prospects;
(iii) Fall in tourist arrivals and consequently a contraction in tourism-oriented sales.
Chart 1: Retail sales suffered due to social unrest
Consumption to remain resilient in the face of headwinds
Chart 2: Investments have also decelerated but consumption remains resilient
Chart 3: Quarterly GDP growth fell and is expected to remain muted
Impact of social unrest largely isolated to tourism-oriented industries
Chart 4: Real Estate and Consumer Discretionary sector account for total weightage of 15% in Hang Seng Index.
Chart 5: Share prices of Hong Kong retail mall operators were badly beaten down since start of the protests.
Limited impact of social unrest on overall corporate earnings
Chart 6: Majority of HSI’s underlying revenue is derived from Mainland China region
Chart 7: The substantial earnings downgrades meant that negatives are mostly priced in
Beaten down valuation offers attractive upside potential for Hong Kong equities
Chart 8: HSI Index is currently trading at one standard deviation below its ten-year average.
Table 1: Upside Potential of Hang Seng Index
|
Hang Seng Index |
FY2018 |
FY2019 |
FY2020 |
FY2021 |
|
12M Forward PE Ratio (X) |
10.8 |
10.4 |
9.9 |
9.1 |
|
Expected Earnings Growth YoY |
8% |
4% |
6% |
8% |
|
Earnings Per Share (EPS) |
2398 |
2501 |
2663 |
2879 |
|
Projected Fair Price (HKD) |
- |
- |
31,957 |
34,545 |
|
Potential Upside from Today (%) |
- |
- |
+22% |
+31% |
Source: Bloomberg, iFAST compilations.
Take part in the attractive upsides offered by Hong Kong equity market!
Chart 9: Resiliency in HSI earnings lend support to a near-term recovery in HSI index performance
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