To say that Hong Kong stocks have been volatile the last few months would be a massive understatement.
The Hang Seng Index, a barometer of the Hong Kong stock market, has had wild swings this year. It made impressive gains in the first half of 2019, from around 25,130 to a peak of close to 30,160. But political unrests and protests in the city have rocked investor sentiment. Since the protests began in the city, the Hang Seng Index has shed around 12%.
This week, though, there was some reprieve as Hong Kong leader Carrie Lam announced the withdrawal of the hugely unpopular extradition bill. Buoyed by the news, investors flooded the market, pushing the Hang Seng Index up 4% on Tuesday, the day the news broke, marking the biggest single-day gain since November 2018.
But the big question on investors’ minds would be whether the protests will have a lasting impact on businesses there.
Hong Kong enjoys a status as a hub for multinational corporations. It is seen as the gateway to China and numerous companies have set up their regional headquarters in the city. However, some experts are warning that this may change if China steps in to resolve the protests by taking more control of Hong Kong.
On the flip side, others are more optimistic. Hongkong Land Holdings Limited (SGX: H78) chief financial officer, Simon Dixon said that despite the uncertainty over how the protests will develop, he believes protests are usually short-term in nature and that over the long-run, Hong Kong will remain an attractive place to do business.
Whatever the long-term consequence is, most observers and analysts will agree that Hong Kong’s economy will feel the pinch over the short-term.
A recent business survey showed that Hong Kong is on the brink of a recession. Private sector activity plunged to a decade-low in August, and business confidence has slumped to an all-time low on record.
The IHS Markit Hong Kong Purchasing Managers’ Index (PMI) fell to 40.8 in August, down from 43.8 in July. A reading below 50 indicates contraction.
The PMI over the last few months indicates that the economy might contract at an annual rate of around 4% to 4.5%.
Time to load up on Hong Kong stocks?
Despite the clear near-term headwinds, does the sell-down of Hong Kong stocks represents a good buying opportunity?
On the surface, it does seem that the Hong Kong stock market, in general, is cheaper than its historical average. The Hang Seng Index is reported to have a price-to-earnings (PE) multiple of 10.2, well below its historical average of 13.8.
However, investors should note that although its PE ratio is below its historical mean, a shrinking economy could mean that Hong Kong companies suffer an earnings decline. This, in turn, will affect the PE multiple of the Hong Kong stock market.
Investors will also need to consider the long-term impact on the Hong Kong economy and companies that operate in the city. As mentioned above, the long-term impact is uncertain, with analysts and experts unable to agree on what’s coming next. Some are warning that Hong Kong’s economy might see an exodus of talent and companies, while others are more hopeful that businesses will continue to view Hong Kong as a safe place to set up shop.
Based on the information that I have seen so far, it is impossible to know what the future holds for Hong Kong. Ultimately, I feel that investors should take a cautious approach and stick to the sidelines, for now, to see how things pan out. With limited visibility ahead, I rather not stick my head out to make any predictions. As such, I advise investors to err on the side of caution and not to make any speculative bets on Hong Kong until a more concrete picture appears.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned. The Motley Fool Singapore has recommended shares of Hongkong Land Holdings.