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HSI At Highs

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  • Post last modified:December 21, 2018

The Hong Kong stock market seems to be bursting its seams. Investors have bid up the Hang Seng Index 29% YTD and even more so for more economically sensitive stocks. Tencent, the largest market cap stock in the HSI, has rallied over 80% YTD. Drivers of the HSI are naturally the largest cap issues due to the market cap weighted methodology of the index.

One of the biggest winners for big cap Hong Kong investors has been Geely Auto – raging 280% YTD. The $239B HKD company operates in the automotive manufacturing space with iconic brands like London Taxi and Volvo and has realized much better than expected profits. Earnings per share for the firm have grown 113% YoY and represent the largest improvement within the index.

Other top price performers include AAC Technologies, China Shenhua Energy, and Ping An up 90%, 70%, and 60% respectively. Interestingly enough, the bull market has had such wide breadth that only 2 stocks in the HSI are down YTD.

Historically speaking, the Hang Seng Index trades at 13.9x earnings on average, going back to 1973. While the current multiple of 15 is above normal, equities are nowhere near previous bull market PE ratio highs. Recent tops in this statistic naturally occurred during the tech bubble and 2008 highs when the index traded at 25x EPS.

According to data from the Wall Street Journal, Hong Kong has actually outperformed all of its peers in the Asia -Pac region YTD. South Korea’s Kospi (up 20% YTD), the Philippines PSEi (up 22% YTD), and China’s Dow Jones 88 (up 21% YTD) were the closest to HK’s gains. Moreover, HK has outperformed The Global Dow up only 16% this year thus far.

Other than individual component drivers, the macro environment is certainly a tailwind to stocks. Just last week China announced that it intends to cut the reserve ratio requirement in efforts to spur lending. Starting 2018, banks will be required to hold less capital (between half and 1 percentage points less). With this news and the Fed increasing interest rates, in the near term the banking environment it set to catch even more wind in its sails.