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Hong Kong 50 forecast: Is it time to invest in China?

By Mensholong Lepcha

Edited by Georgy Istigechev


Updated

The Hong Kong Stock Exchange
The HK50 soared 26.6% in November, recording the Hang Seng index’s highest monthly gain since October 1998 – Photo: ADRIAN3388 / Shutterstock.com

Times of extreme risk aversion prompt investors to look for anomalies in equity markets to gain market-beating returns and hedge against domestic market risks. Could Chinese stocks fit into this category?

The Hong Kong benchmark Hang Seng (HK50) Index’s 17.4% return over the past month as of 6 December 2022, versus the timid US benchmark S&P 500 (US500) Index’s growth of over 3% in the same period, could support that argument. 

The HK50 soared 26.6% in November – the Hang Seng index’s highest monthly gain since October 1998, or near the end of the Asian financial crisis 24 years ago.

The outperformance of Chinese stocks over the course of the entire year, however, is questionable. In 2022, the S&P 500 Index has fallen 16.95% year-to-date (YTD) while the Hang Seng Index has shed a similar 16.91% as of 6 December.

Live Hang Seng Index (HK50) Price Chart

On the macro front, China is currently on a monetary easing cycle as opposed to the global monetary tightening cycles seen in numerous countries across the world.

Consumer inflation in China has remained anchored – it dropped to 2.1% year-over-year in October 2022, from 2.8% in the prior month – in sharp contrast to decade-high inflation in the US, the UK and other developed economies. Furthermore, valuations of Hong Kong-listed equities have recently fallen to their lowest level in over six years, which could bode well for their attractiveness to traders.

Strict Covid-19 restrictions in the country remain a substantial risk for Asia’s biggest economy. In the longer term, geopolitical risks are the biggest potential headwind when investing in Chinese companies.

Let’s dive deeper into the subject and review the HK50 forecast for 2023 and beyond from analysts and algorithm-based prediction websites.

Hang Seng Index outlook: Gateway into China

The Hang Seng Index tracks the 50 largest and most liquid stocks listed on the Main Board of the Stock Exchange of Hong Kong. The index is also referred to as the Hong Kong 50 Index.

The Hong Kong 50 Index gives investors exposure to some of the biggest Chinese companies.

Financials is the largest sector on the index, with a weightage of over 36% as of October 2022. One of the world’s leading banking groups, HSBC (0005), has a weight of 8.9%. The Industrial & Commercial Bank of China (ICBC), the world’s largest bank in terms of total assets, has a weight of 2.83%. China Construction Bank (0939) and Bank of China (3988), which are among the world’s top five biggest banks, are also part of the index.

The information technology sector is the second largest, with a weightage of 27.12%. Gaming-to-music services firm Tencent (0700), e-commerce giant Alibaba Group (9988) and food delivery company Meituan (3690) were among the top five highest weighted companies on the Hong Kong 50. 

Over 8% of the index was weighted towards “red chip” stocks. These are companies with considerable Chinese government stake, and include telecoms operator China Mobile (0941), energy giant China National Offshore Oil Corporation (0883), real estate conglomerate China Overseas Land & Investment (0688) and beverage firm China Resources Beer (0291). 

Additionally, the index had a cap of 8% on constituent weighting to avoid single stock domination. 

Price performance in 2021 amid regulatory drive   

Going back to the start of 2021, Chinese stocks outperformed their global peers as the nation’s strict social distancing rules helped its economy open up faster than much of the rest of the world. 

However, after Chinese authorities embarked on a regulatory sweep on Big Tech and other private sectors, the Hang Seng Index lost about 25% from its February 2021 peak of 31,183 points to close the year at 23,397.

Tech stocks, including Alibaba Group and Tencent, were hit the hardest as data security became a primary concern for authorities. In July 2021, the Hang Seng fell nearly 10% after Beijing tightened its regulatory oversight on all overseas-listed companies as ride-hailing firm DiDi Global (DIDI) was targeted for listing in New York.

There was no respite for Chinese equities as President Xi Jinping pushed for the ‘common prosperity’ agenda. Tutoring companies were forced to go non-profit and barred from listing on stock exchanges as authorities saw the high cost of education as one of the root causes of China’s dwindling birth rates.

High property prices were also seen as a key hindrance for Chinese households when deciding whether or not to have a new child. In pursuit of ‘common prosperity’, the Beijing authorities cracked down on the country’s property sector by capping bank loans, restricting debt accumulation and introducing property taxes.

In 2021, Chinese property developers like China Evergrande (3333) made international headlines as falling property prices and rock-bottom consumer confidence exposed firms to default risks. The downturn in the Chinese property sector would add further pressure on the Hang Seng, resulting in the benchmark wiping out nearly all of the post-pandemic gains by the end of 2021.

2022 would see Chinese cities experience their strictest lockdowns to date. Existing Sino-US tensions flared as the US Securities and Exchange Commission (SEC) identified Chinese companies at risk of being delisted from their US listings. Hang Seng constituent China Mobile and Tencent’s US-listed music services arm were named on the SEC’s Holding Foreign Companies Accountable Act list.

Strategists at Goldman Sachs said that from February 2021 to October 2022, the Hang Seng index saw a “systemic correction” – a fall of 40% or more.

During that period, the HSI plunged 53% from peak-to-trough, Goldman strategists noted. The firm’s China equity strategists Kinger Lau and Si Fu told CNBC in an email:

“This is the most significant market sell-off since the dislocation during the Global Financial Crisis, also putting the drawdown into the Systemic category per our classification.”

The index briefly dipped below the 15,000 level in late October before embarking on its current rally, which saw it gain 26.6% in November 2022 alone.

Hong Kong 50 Index Performance (2017-2022)

Hong Kong 50 forecast 2022: Risks and opportunities

Key macroeconomic themes that are dominating global investing sentiment in 2022 could help to understand factors influencing the Hang Seng Index forecast and to assess whether investing in Hong Kong-listed Chinese stocks is worth the risk. 

Inflation

Inflation has risen to four-decade highs in the US. However, China doesn’t seem to be under similar inflation pressures.

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According to data from China’s National Bureau of Statistics, annual inflation dropped to 2.1% year-on-year in October 2022 from 2.8% in the prior month, compared with market consensus of 2.4%. This was the lowest figure since May, due to a slowdown in cost of both food and non-food. 

Core consumer prices, excluding the volatile prices of food and energy, rose by 0.6%, the same pace as in September. On a monthly basis, consumer prices increased by 0.1% in October, compared with estimates and September’s reading of 0.3%.

Monetary policy

China’s anchored inflation gives its central bank plenty of room to ease monetary policy and maintain an accommodative stance. The Chinese central bank has conducted multiple reserve requirement ratio (RRR) cuts since 2021, adding extra liquidity to its financial systems. 

RRR cuts reduce the cash reserves required to be maintained by commercial banks, opening up liquidity for the rest of the economy.

The People’s Bank of China (PBoC) kept its key lending rates unchanged for the third straight month when setting them in November, amid continued downward pressure on the yuan and a slowdown in economic activity due to rising Covid-19 cases and restrictions or lockdowns in several cities.

The one-year loan prime rate (LPR), which is used for corporate and household loans, was kept at 3.65%, while the five-year rate, a reference for mortgages, was maintained at 4.3%. 

Covid-19 restrictions

China’s extreme Covid-19 strategy of locking down entire cities has hit economic growth. In April, retail sales and exports reported their weakest monthly reading since the start of the pandemic in 2020.  However, a recent wave of protests appears to have pressured the government into easing away from its ‘zero-Covid’ policy, with markets reacting positively to the news.

The rally in the equities market is due to a “clear” path away from China’s zero-Covid policy, Hao Hong of Grow Investment Group said on CNBC’s Street Signs Asia:

“The direction is very clear, because before this, many people and markets were having lots of doubts about whether China was serious about moving forward on phasing out Covid-zero. Now, it seems to most people that Covid-zero is being phased out, and that’s why the market is reacting very strongly.”

Following the news of China further relaxing some of its Covid-19 restrictions, strategists at Morgan Stanley raised their rating for Chinese equities to overweight.

Strategists led by Laura Wang said in note on 4 December that the upgrade marks the end of the firm’s equal-weight stance on Chinese equities, which it has held for 23 months since January 2021 – almost two years.

Morgan Stanley noted multiple factors that indicated a “meaningful positive development” for Chinese stocks since November, including what the firm views as “a confirmed path towards final post-Covid reopening”.

A “path towards reopening is finally set, likely bumpy but with no turning back,” the note said, adding that a clear direction for the nation to open up was reinforced when health officials announced detailed plans to boost vaccinations among the elderly.

Geopolitical risks

Persistent Sino-US tensions could pose the key risk to investing in the Hang Seng. Investors need to watch out for news of potential US delistings of Chinese stocks, sanctions on Chinese firms, restrictions on technology transfers, trade war tariffs and developments around China’s relations with Russia.

2022 has seen the US impose a diplomatic boycott of the Beijing Winter Olympics due to alleged human rights abuses in Xinjiang. The Biden Administration has called China the “most serious long-term challenge to the international order,” as reported by the Council of Foreign Relations, and has focused on investing in domestic industry, infrastructure and technology to compete with China globally.

Valuations

Bloomberg data showed that the Hang Seng was the least expensive compared to the US benchmark S&P 500 Index and Mainland China blue-chip CSI 300 Index as of 6 December 2022. 

The Hang Seng was trading at a price-to-earnings (P/E) ratio of 6.82, which is lower than its three-year average of 12.3. The S&P 500 was trading at a P/E ratio of 19.05, while the CSI 300 was trading at a P/E ratio of 14.44.

According to TradingEconomics’ Hong Kong 50 forecast for 2023 as of 6 December 2022, the index was expected to trade at 15,026.19 points by the end of next year.

Hong Kong 50 forecast for 2025 and 2030

China has been long touted as the successor to the US economic dominance. China is seen as a manufacturing hub, contributing about 27% of the world’s global manufacturing output, according to UNIDO Statistics

Asia’s biggest economy wants to boost its tech capabilities, having seen Chinese firms like telecoms equipment maker Huawei and artificial intelligence (AI) company SenseTime barred from accessing critical technologies such as semiconductors, quantum computing, AI, bioeconomy and autonomous systems by the US.

“For Beijing’s top leaders, the worst of the damage from the US-China trade wars, which started in spring 2018, emanated not from tariff hikes but rather the restrictions on technology transfers and exports of key high-tech components to some of China’s largest manufacturing and computing companies, such as Huawei and SMIC (China’s largest semiconductor manufacturers),” Nomura said in a 2021 report.

Jitania Kandhari and Amay Hattangadi of Morgan Stanley said in a report that, going forward, growth in China will come from the next generation of “hard tech” driven economy:

“China’s economy grew thanks to consumer Internet service giants that offered shopping, entertainment, mobile banking and the like. We believe the next turn will be to science-based industries like semiconductors, artificial intelligence, quantum computing, biotech and high-end manufacturing. Xi is pushing for self-reliance in tech, and less dependency on the US in order to localize supply chains,” said Kandhari and Hattangadi in a 2022 report entitled ‘The Beijing Put – Stemming The Downward Spiral’.

“In our opinion, the well-known ‘New China’ names that dominated the market in the last decade will continue to fade. What excites us are the next generation science-based industries that will create world-class companies which will attract talent and generate well-paid jobs and steady earnings growth.”

UBS’s Chief Investment Office said it sees “longer-term opportunities in China’s fintech leaders”. Fintech revenues are expected to grow from $225bn in 2020 to $750bn in 2030. 

Alibaba affiliate Ant Group, Ping An Technology and Tencent are the top three fintech companies in China, according to IBS Intelligence.

“Rapid urbanization and the need for financial inclusion should drive demand for fintech services in digital areas like mobility, cloud computing, analytics, social media, and emerging technologies such as distributed ledgers and artificial intelligence. Stronger demand from millennials and favourable regulations are other supportive demand factors,” said the UBS Chief Investment Office. 

The aforementioned themes are expected to be key drivers with regards to the long-term  HK50 forecast for 2025 and beyond. 

Looking forward, TradingEconomics’ Hang Seng index prediction estimated it to trade at 15,026.19 in 12 months’ time. According to the Economy Forecast Agency, the index could trade at 10,565 in June 2024.

The forecasting services did not provide a long-term Hong Kong 50 forecast 2030. 

If you are interested in the Hang Seng Index, it’s important to always conduct your own due diligence before trading. Never invest or trade money you cannot afford to lose. Also note that analysts’ predictions can be wrong, and that forecasts should not be used as a substitute for your own research.

FAQs

Is Hong Kong 50 a good investment?

The Hang Seng consists of the 50 largest and most liquid stocks listed on the Stock Exchange of Hong Kong. The index comprises some of the world’s biggest banks, including ICBC and BOC, and Chinese Big Tech companies like Alibaba Group and Tencent.   

If you are interested in investing in the Hang Seng it is important to always conduct your own due diligence before investing. Please remember never to invest or trade money that you cannot afford to lose.

Will Hong Kong 50 go up?

The Hong Kong 50 index is affected by various factors, including the macroeconomic environment, company earnings, profits outlook and regulations. China’s zero-Covid policy remains a key risk for Chinese equity markets.

Should I invest in Hong Kong 50?

Investing in the Hong Kong 50 (HK50) Index could give you exposure to some of the biggest publicly listed firms in China. However, it is important to always conduct your own due diligence before investing. Please remember never to invest or trade money that you cannot afford to lose.

Markets in this article

9988
Alibaba Group
72.7 USD
0.5 +0.700%
3988
Bank Of China
3.834 USD
-0.01 -0.260%
0939
China Construction Bank
5.80 USD
0 0.000%
0688
China Overseas
14.00 USD
-0.3 -2.110%
0291
China Resources Beer
27.95 USD
0.2 +0.730%

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