Source: Finance Association

The Hong Kong stock market is about to say goodbye to 2023. Currently, there are still three trading days left until 2024. Overall market performance this year has been poor. By the close of last Friday, the Hang Seng Index, Hang Seng Technology Index, and State-owned Enterprise Index had a cumulative decline of 17.40%, 14.07%, and 18.14% for the whole year, closing at 16340.41 points, 3548.05 points, and 5488.99 points, respectively.

Due to the Christmas holidays, the Hong Kong stock market was closed from Monday to Tuesday, and trading resumed today.

It is worth noting that some institutions pointed out that if the Hang Seng Index closes below 19781.41 points at the end of this year, this will be the first time since 1974 that Hong Kong stocks have recorded four consecutive declines. At the moment, this seems quite likely.

The performance of Hong Kong stocks has disappointed most investors. Shareholders' discussions on Hong Kong stocks have changed from the withdrawal of overseas capital, marginalization, and serious damage to financing functions, to a broader topic of loneliness. Even domestic star fund manager Ge Weidong said earlier that compared to A-shares, Hong Kong stocks are more difficult. They have disrupted 30 years of investment experience and knowledge, and even if Buffett and Soros come, they will be buried.

Why is it so difficult for Hong Kong stocks in 2023?

In fact, the Hong Kong stock market had a strong start at the beginning of this year, thanks to adjustments in China's favorable policies such as epidemic prevention and control and the strengthening of investors' expectations for China's economic growth. Subsequently, the rebound in Hong Kong stocks was suppressed by factors such as the Federal Reserve's interest rate hike four times in a row in 2023 and the continuing widening spread between China and the US.

The poor performance of the Hong Kong stock market is mainly affected by three major factors. First, the Fed's interest rate hike is one of the main reasons for the weak performance of the Hong Kong stock market. As the Federal Reserve raised interest rates, global liquidity tightened and risk appetite declined, leading to a general decline in global stock markets. As an important component of the global stock market and the correlation with European and American stock markets, the Hong Kong stock market is hardly spared.

The second factor is the widening of the China-US spread. The spread between China and the US widened due to the Federal Reserve's interest rate hike, causing capital to flow from Hong Kong stocks to the US.

Finally, there is the risk of a global recession: as the Federal Reserve raises interest rates and global inflation rises, the risk of a global recession rises. The economic recession will cause corporate profits to decline, which will have a negative impact on the stock market.

Furthermore, China's economic performance has also had an impact on Chinese companies listed in Hong Kong. CICC pointed out in a November research report that since this year, the effects of implementing the credit relief policy have not been as remarkable as expected. The main reason is that lower return on investment expectations have temporarily curtailed the private sector's willingness to invest. According to their calculations, they found that the return on investment for residents and the business sector is generally lower than or close to the corresponding financing costs. Under these circumstances, the public sector credit, or fiscal deficit, grew more slowly than last year. The fiscal deficit pulse is at a new low since 2021, and the overall situation is tight.

Which sectors will perform well in 2023?

Although the three major indices of Hong Kong stocks did not perform well in 2023, the major sectors did not keep pace, and automotive, consumer electronics, and energy stocks performed well.

Using data as of December 22, the Financial Services Association selected the companies with the highest gain/loss ratio among medium and large individual stocks with a market capitalization of over HK$300:

Among them, the companies with the highest gains include New Oriental, Lenovo Group, Ideal Auto, CNPC, CNOOC, Xiaomi Group, Xiaopeng Motors, BYD Electronics, China Petroleum & Chemical Co., Ltd., and China Coal Energy.

The above companies rose between 15.52% and 89.82%, respectively, showing strong upward momentum. These companies are involved in a variety of industries, including education, technology, energy, and manufacturing.

Companies with the highest declines include Li Ning, China Finance, Meituan, Vanke, Pharmaceutical, Ganfeng Lithium, JD Group, Longhu Group, Haidilao, Kuaishou, Anta Sports, and Tencent Holdings. The companies' decline ranged from 12.97% to 69.80%. These companies are also involved in multiple industries, such as retail, real estate, biotechnology, and the internet.

Specifically, NEV companies, including Ideal Auto and Xiaopeng Motor, are benefiting from the rapid growth of the global NEV market. According to data, in the first three quarters of 2023, global NEV sales reached 9.746 million units, of which China sold 6.278 million units, accounting for 29.8% of China's new vehicle sales. By the end of the third quarter of 2023, the cumulative sales volume of new energy vehicles worldwide was about 37.7 million units, with China accounting for about 60%.

However, at the same time as the NEV market is growing rapidly, the price war is also intensifying. In order to compete for market share, major car companies have lowered product prices one after another, and there has even been a phenomenon of “losing money to make money”. This vicious competition not only affects the profitability of enterprises, but may also reduce product quality and harm consumers' interests.

The education industry benefited from the implementation of the “double reduction” policy, and the education and training industry was transformed and upgraded, and the stock prices of education companies such as New Oriental rebounded. Oriental Selection, a subsidiary of New Oriental, became an instant hit due to live streaming. The stock price once rose to a high of HK$75 during the year. Recently, however, the small essay incident sparked another buzz in the market. According to the latest announcement, influencer Dong Yuhui has been promoted to senior partner and served as a cultural assistant to the chairman of New Oriental Education Technology Group and vice president of New Oriental Cultural Tourism Group. Sun Dongxu, the other protagonist of the incident, was removed from his position as CEO selected by Dongfang.

The performance of consumer electronics this year has been truly surprising. For example, the Xiaomi Group's sharp rise this year was due to the recovery in the consumer electronics market and the progress of the Xiaomi car project. According to the third quarter data released by the company, total revenue reached 70.9 billion yuan, the first year-on-year increase in nearly six quarters; adjusted net profit was 6 billion yuan, up more than 180% year on year, reaching a new high of nearly two years.

In addition, this month, the Ministry of Industry and Information Technology announced a catalogue of new energy vehicle models exempt from vehicle purchase tax. Among them, the Xiaomi SU7 was also included. This news has undoubtedly provided a new growth point for the company's future development.

Additionally, oil and coal stocks also performed well. For example, the stock prices of CNPC and CNOOC increased by more than 50% during the year, while the stock price of China Coal Energy also rose by more than 15%. As the domestic economy recovers, demand for energy is also increasing. As an important type of energy, the increase in demand for oil and coal has further boosted the performance growth of related companies.

Meanwhile, leading companies in consumer and internet industries are affected by some factors, and their stock price performance is weak. For example, Li Ning's stock price plummeted by nearly 70% during the year, and the main company was plagued by high inventory problems. According to data for the first half of 2023, Li Ning's inventory for the first half of 2023 was about 2.12 billion yuan, an increase of 7.25% over the previous year, and the average number of inventory turnover days rose from 55 days in 2022 to 57 days.

Including Tencent, JD, Kuaishou, and Meituan, their stock prices all plummeted by more than 10% in 2023, reflecting the multiple challenges faced by the Internet industry. First, competition in the industry has intensified. With the development of the Internet industry, competition is becoming more and more intense. Competition among internet giants is fierce, and new companies are constantly emerging. As a result, the profit margins of the internet industry are being squeezed.

Second, the impact of policy factors has heightened market concerns. For example, on Friday, the State Press and Publication Administration issued the “Measures for the Administration of Online Games (Draft Draft for Comments)” (hereinafter referred to as the “Draft for Comments”). The new regulations caught the market a bit by surprise, and many game stocks generally plummeted on the same day.

Hong Kong stock market repurchase data hits record high

Despite the sluggish performance of the Hong Kong stock market, the company's buyback activities are still active. According to statistics as of December 23, 2023, more than 200 companies in the Hong Kong stock market have carried out repurchases since this year. The number of repurchases has exceeded 8.524 billion shares, and the repurchase amount has reached about HK$120.6 billion.

Judging from the above trends, as Hong Kong stocks fall year by year, the scale of repurchase amounts of listed companies is increasing year by year. In 2023, the scale of Hong Kong stock repurchases reached a record high, reaching HK$120.6 billion, 3.9 times the annual average of the previous five years.

Specifically, companies such as Tencent Holdings, AIA, and HSBC Holdings have become the “main forces” for repurchases in the Hong Kong stock market. According to statistics as of December 23, 2023, the repurchase amounts of Tencent Holdings, AIA and HSBC Holdings reached 45.4 billion, 27.9 billion, and 20.8 billion, respectively. At the same time, they repurchased 138 million shares, 365 million shares, and 345 million shares, respectively. Furthermore, the repurchase amount of these three companies already accounted for 78% of the total repurchases in the Hong Kong stock market this year.

Tencent Holdings topped the list with a repurchase amount of HK$45.4 billion, showing the company's confidence in its business development and market prospects. Although Naspers, the majority shareholder of Tencent Holdings, continues to reduce its holdings, causing market concerns, the company stabilizes stock prices and rewards investors by buying back shares.

In addition to Tencent Holdings, AIA, and HSBC Holdings, consumer-related companies including Xiaomi Group, Li Ning, Mengniu Dairy, and Bubble Mart have also been listed one after another, with amounts of 1.35 billion, 1 billion, and 790 million, respectively.

For major repurchases by many Hong Kong stock listed companies, this move is one of the important means to help increase equity concentration and enhance investor confidence. By repurchasing shares, companies can reduce tradable share capital, increase earnings per share and shareholders' rights, and thereby enhance the company's market value and competitiveness. In addition, the buyback act also conveys to the market the company's management's optimistic expectations for the company's future development, further enhancing investors' confidence in the company.

Huaxi Securities pointed out today that many industries have ushered in a historical peak in repurchases, and market sentiment is expected to pick up. It is recommended to focus on non-essential consumption, information technology, and industries where repurchase amounts have been at historically high levels since this year and corporate repurchases have greatly catalyzed stock prices.

How to reverse the current “decline” of Hong Kong stocks

As mentioned at the beginning, the continued poor performance of the Hong Kong stock market has aroused investors' concerns to a certain extent. The Hong Kong Special Administrative Region Government of China and the Hong Kong Stock Exchange introduced a series of measures during the year to boost the market.

First, they announced a new capital investor entry plan. One mandatory option is to invest in promising innovative technology companies that have taken root in Hong Kong. In addition, RMB assets, such as RMB stocks, are also included in the plan.

Second, the Hong Kong government announced that it will reduce the stock stamp duty rate from 0.13% for each buyer and seller to 0.1% of the transaction amount. This measure will be officially implemented on November 1, 2023.

Furthermore, the Hong Kong Stock Exchange's interconnection mechanism is constantly being upgraded and optimized. They have increased the connectivity time of up to 10 trading days, added more than 1,000 underlying stocks to the Shanghai and Shenzhen Stock Connect, and included foreign companies in the Hong Kong Stock Connect. In addition, they have also introduced swaps and HKD/RMB dual counter models.

Finally, HKEx reached cooperation agreements with various exchanges, including the Beijing Stock Exchange, Indonesia Stock Exchange, and Saudi Stock Exchange Group. They signed a memorandum of cooperation to explore mutual listing and joint product development to strengthen ties with mainland China, Southeast Asia and other countries and seize development opportunities. Indonesia Stock Exchange and Saudi Stock Exchange have also been included in the HKEx's list of accredited stock exchanges, and their listed companies can apply for a secondary listing in Hong Kong.

How to invest in the Hong Kong stock market in 2024?

According to several research reports, the Hong Kong stock market will rebound in 2024. Research reports all point out that the momentum for the subsequent rebound mainly comes from the following aspects.

The expected shift in the Federal Reserve's monetary policy: The Federal Reserve has made it clear that it will start cutting interest rates in 2024, which will help improve overseas liquidity, thereby boosting the valuation of Hong Kong stocks.

The domestic economic cycle is picking up: As the steady growth policy continues to gain strength, the Chinese economy is expected to pick up in 2024. This will help improve the fundamentals of Hong Kong stocks.

The valuation of Hong Kong stocks is at a historically low level: as of December 24, 2023, the Hang Seng Index PE valuation fell to the 1.75% fraction level since 2019, which is highly cost-effective.

In terms of sector allocation, several brokerage firms pointed out that individual stocks related to technology, offshore logic, and long-term dividends are worth paying attention to.

High-end technology: Focus on long-term structural opportunities brought about by industrial upgrading under technological innovation, such as semiconductor industry chains, software and services, consumer electronics, and innovative pharmaceutical-related sectors.

Overseas logic: Focus on mid-tier manufacturing with complex industrial chains, certain technological content but not core technology, and some consumer goods with certain product and brand strength advantages.

Long-term dividend capacity: In an uncertain growth and policy environment, high-dividend sectors provide deterministic returns with stable dividends, such as telecommunications, utilities, and energy. In the short term, until further obvious policy inflection points are seen, central state-owned enterprises with stable dividend capacity and higher dividend potential can effectively hedge against market fluctuations and exchange rate depreciation, thus acting as a relatively stable defensive strategy.

Although most institutions are optimistic about the steady journey of the Hong Kong stock market in 2024, investors still need to pay attention to the impact that factors such as geopolitical risks and Sino-US relations may have on the market.

CCB International pointed out that as the risk of a recession in the US economy will further increase, cyclically sensitive risk assets will bear downward pressure. As the US election window approaches, geopolitical risks are likely to heat up in the second half of the year.

CICC also pointed out that the future direction of Sino-US relations is an important factor affecting investors' risk appetite. Although there have been some signs of easing recently, investors still need to pay close attention to the official statements of the two sides and related policy documents, as well as the possible impact on foreign capital flows.

Editor/Jeffrey