Source: Finance Association
① How do institutions analyze the short-term upside of the Hong Kong Hang Seng Index? ② Which sectors do they think are worth paying attention to right now?
The Hong Kong stock Hang Seng Index recently rose from 16,244 points at the close of April 19 to the closing of 19636 points on May 20, with a cumulative increase of nearly 20%. As of today's close, the Hang Seng Index fell more than 2%. Is there room for this important index to rise in the short term? If there was space, how big would it be? Which sectors have more opportunities? Several institutions have successively published research reports to analyze this.
The Hong Kong Stock Hang Seng Index has room for short-term growth
Yan Zhaojun, an international strategy analyst from China and Thailand, released a research report on May 20. He believes that the current Hang Seng Index is 9.7 times higher than the 24-year forecast PE recovery. The risk premium is below the two standard deviations of the rolling two-year average, and the AH premium index has also fallen back to 133.3 points, which is in the 14.3% quantile since 2020, reflecting that the valuation of Hong Kong stocks has been drastically repaired, the technical side is greatly overbought, and there is not much room for short-term upward trend in the index. The subsequent market may shift from a one-sided rise to a high level of turbulence, while high-quality companies with strong profitability have the opportunity to continue to receive revaluation.
Yan Zhaojun said that it is still impossible to rule out the fact that the market will briefly ignore technical overpurchases and weak economic recovery. Assuming that the profit forecast remains unchanged, the risk premium for the Hang Seng Index falls further to 5% (January 2023), and the yield on US 10-year Treasury bonds is 4.3%, then under the most optimistic circumstances, the Hang Seng Index may rise to 21,600 points.
Liu Gang, Wang Muyao, and others from CICC's strategy team released a research report on May 19 stating that the current funding sources for Hong Kong stocks are mainly transactional and regionally allocated funds for partial rebalancing needs. Assuming that active foreign capital outflows in the first quarter are used as an approximation of regional capital rebalancing requirements, the first phase may have inflows of about 5 billion US dollars. If we further assume that all active foreign capital is converted from low allocation to standard allocation, it is expected to bring in about 40 billion US dollars in inflows.
The key question now is, how much room is left to rise? Assuming that the risk premium returns to the level of early 2023, the first phase of the Hang Seng Index assumes a target point of 19,000-20,000 points, which is now basically close.
According to CICC, the impetus for the further rise in the market comes from:
1) The risk-free interest rate declined further;
2) What is more important is profit growth. If profit increases by 10% in 2024, it may be expected to push the market to 22,000 points, and profit growth is highly dependent on subsequent fiscal strength and progress.
Current fundamental support is not only limited, but has also been weakening recently, reflecting the lagging effects of the slowdown in fiscal expansion since February. The overall domestic economic data for April was weak, particularly in the investment, heavy consumption, and real estate markets. Real estate sales volume and price continue to be weak, and corporate inventory pressure is high, all indicating the need for further policy support.
On the contrary, optimistic expectations about the effects of the recent policy “combo punch” reflect a further restoration of risk premiums. For policies to be effective, particularly reflecting fundamentals, overall strength and speed of progress are critical, not just goals. Eliminating the lower limit of mortgage interest rates and reducing the down payment ratio are both expected to boost immediate demand in the short term, but government collection and savings may be the key. Whether investment returns can cover costs is one of the key factors in whether collection and savings can be widely implemented.
CICC said that looking ahead, more room for growth depends on the following two aspects:
1) Interest rates on 10-year US bonds have declined further. The current level of US bond interest rates is quite reasonable, and it is difficult to contribute more to the rise in the market in the short term;
2) More importantly, whether fundamentals can be improved may depend on symptomatic policies, that is, the strength and speed at which the central government will increase leverage.
Dai Kang, managing director of the GF Securities Development Research Center and chief asset research officer, released a research report on May 20 saying that after the recent sharp rise, the current valuation level of the Hang Seng Index is still somewhat cost-effective. As of May 7, 2024, the Hang Seng Index's forward PE was 8.97 times, below the average value of -1 STD, which has rarely stayed since 2010 (cheap). The Hang Seng Index ERP, which is based on 10Y US Treasury interest rate estimates, is near the historical average since 2010 (reasonable).
Dai Kang also said that according to model estimates, under an optimistic assumption, Hong Kong stock ERP is expected to reach the level of a reduced version of “the end of January last year” after continuing favorable financial conditions for Hong Kong stocks and continuous improvement in policy expectations. Under this assumption, based on the Hang Seng Index forward ERP at the end of January last year and the current 4.5% US bond interest rate, there is still some room for growth in the Hang Seng Index forward PE.
Investment opportunities
As for investment opportunities, Sino-Thai International suggests focusing on the sector level, such as
1) Technology (games, consumer electronics) and biomedicine benefiting from the return of foreign capital and underdeveloped trends;
2) Oil, coal, telecommunications and electricity with high dividends;
3) Copper mines, household appliances, textiles, shipping, international consumer goods, etc. benefiting from the recovery of overseas economies;
4) The real estate “storage” plan is expected to benefit some leading housing enterprises, property management and construction agencies in first-tier cities, as well as an improvement in risk appetite in the capital market, which is expected to drive up income on the domestic insurance investment side.
CICC's research report mentioned that in terms of allocation, there is currently no clear possibility of significant leverage, so they are unwilling to completely abandon the “dumbbell” strategy (high dividends+technological growth) and completely switch to the procyclical sector.
editor/tolk