The epidemic in Hong Kong has eased significantly recently, and new Covid-19 cases and deaths have gradually declined. Will this positively impact the sluggish Hong Kong stock market?
The fifth wave of the epidemic in Hong Kong broke out in early February after the Lunar New Year’s has caused a lot of economic and financial impacts on the city. During the epidemic’s peak in early March, more than 70,000 new coronavirus infections were reported in a single day.
Fortunately, since mid-to-late March, the current round of the epidemic has shown signs of improvement. According to the statistics of the Hong Kong government, there were 8,037 new positive confirmed cases in Hong Kong on 27 March and fell to only 3,709 new infections on 3 April.
The instantaneous impact of the epidemic and the social distancing and quarantine measures put pressure on local medical resources and seriously disrupted the economic activities in Hong Kong. Since mid-February, the Hong Kong stock market has been going through a hard time.
Under the pressure of various factors such as internal and external regulatory concerns about Chinese stocks listed in the U.S. exchanges, local epidemics and geopolitical crises, causing a capital outflow tide spread from technology stocks to mainland real estate, insurance, retail and other sectors. The Hang Seng Index fell to a 10-year low at one point in mid-March.
Signals of Market Recovery Emerge
When the market is at its worst, there is always a new turn. After the Chinese authority signified efforts to stabilize the stock market and the economic circumstances on 16 March, Hong Kong stocks started to bounce back. On 1 April, Bloomberg reported that China is considering giving the U.S. full access to audit information of most of the 200 US-listed Chinese companies, signalling the green light to maintain their status in the U.S.
On this basis, the gradual improvement of the local epidemic situation in Hong Kong also helped improve investors’ sentiment and eased the pressure on local stocks. Since then, the Hang Seng Index has stabilized at 21,000-22,000 points.
The Rebound Could be Modest
Although the Hong Kong stock market is traditionally more vulnerable to external regulatory disturbances than A-shares, the lower valuations at the current level could be its advantage. There may still be short-term market fluctuations, but the panic selling seems to have ended already, and the market has gradually entered the bottom-grinding stage.
The recent announcement of large-scale buybacks by Chinese tech companies such as Alibaba and Xiaomi also reflected that the current valuation of Hong Kong stocks is increasingly attractive. Hong Kong stocks will have greater flexibility to grow if the external environment improves.
However, if global energy prices continue to rise amid the Russia-Ukraine conflict, the market’s concerns about global stagflation will suppress the recovery of the overall Hong Kong stock market. Therefore, the room for recovery in the short term is expected to be moderate.
In terms of strategy, HNWI investors could focus on value stocks with stable growth and high dividends in sectors such as banks and telecommunications. In addition, hotels, catering, and tourism stocks could benefit from the slowing down of Omicron’s global and local spread.
Investors can adopt a dollar-cost averaging strategy to reduce the impact of market volatility and stay tuned for the new market development in the second half of the year. If the quarantine-free travel to the mainland between Hong Kong and Mainland China resumes, a more robust economic and stock market recovery driven by the local economy, such as real estate and retail, could be expected.