Hong Kong stock investors are the worst off in 16 years relative to the rest of the world as recession may grip the city through 2020.
The remains near its lowest level relative to the MSCI All Country World Index since 2004. Following Monday’s fresh slide, it’s also at a more than three-year low relative to China’s CSI 300 Index. That gap has widened since Jan. 23, the last trading day in China before the Lunar New Year holiday — the CSI 300 has climbed 3.2% since while the Hang Seng has dropped 3.9%.
Hong Kong already faced a gloomy outlook before the coronavirus emerged, as months of political unrest pushed the city into recession and made it among the world’s weakest major stock markets in 2019. Reliant on tourism, a move to quarantine anyone coming from mainland China has helped batter already-depressed visitor counts and is expected to result in back-to-back annual contractions for Hong Kong’s economy and further increases to unemployment.
“Hong Kong has a rather unbalanced economy, which relies heavily on sectors like retail and tourism that will be hit hard by the virus due to less mainland visitors,” said Ronald Wan, chief executive of Partners Capital International Ltd. “It’s a market with high risk at the moment.”
City officials aren’t offering much optimism to investors. Paul Chan, the city’s financial secretary, wrote last week that Hong Kong is facing “tsunami-like” shocks and may incur a record budget deficit in the next fiscal year, with coronavirus impacts being felt beyond retail, restaurants and tourism.
Hong Kong, restrained by a currency peg to the U.S. dollar, has no independent monetary policy. The city’s legislative council on Friday passed a HK$30 billion ($3.85 billion) spending plan for virus-fighting efforts and to assist businesses. Further steps are to be introduced Wednesday in the government’s budget proposal.
In contrast, Chinese authorities have generated a long list of support measures to bolster the world’s second largest economy — cutting taxes and lowering interest rates among other moves. Chinese President Xi Jinping said authorities will step up policy adjustments to achieve this year’s economic and social goals, state-run CCTV reported Sunday. The stimulus has kept investors there in a buying mood following Feb. 3’s record stock rout.
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“While the Chinese government can utilize both monetary and fiscal policy tools to stimulate its economy, there’s nothing much Hong Kong can do on rates and money supply due to its U.S. dollar peg,” said Alex Wong, director of asset management at Ample Capital Ltd. “There’s no such option as a government rescue, so it’s normal to see lower stock valuations.”
Citigroup Inc (NYSE:). analysts said in a research note Monday that Hong Kong shares are liable to continue lagging mainland markets in March. There’s potential for Beijing to announce fresh stimulus next month, they wrote, adding that disappointing earnings news might hurt Chinese-listed equities less than those in Hong Kong. There, institutional investors have a bigger influence and are more worried about fundamentals than retail investors, who dominate Chinese trading.
This year’s earnings forecasts for Hong Kong stocks have dropped by the third most among MSCI Asia Pacific ex-Japan companies since mid-January, said Goldman Sachs Group Inc (NYSE:).
“Many sectors, including retail, property and tourism, hadn’t recovered yet from the the protests last year and the market was still waiting for their annual reports to gauge the earnings impact,” said Alexious Lee, head of China strategy research at Jefferies Hong Kong Ltd. “Now that we also have the epidemic, nobody knows whether and how worse the Hong Kong fundamentals will be for 2020.”
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