(Bloomberg) — Hong Kong’s world-leading stock rally shows no signs of abating as the city’s peg to the U.S. dollar boosts its appeal as a haven amid the threat of longer-term higher U.S. interest rates.
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The Hang Seng Index rose 2.5% on Thursday, entering a technical bull market, although there were no buyers from mainland China due to a holiday. The risk-sensitive Hang Seng Tech Index rose 4.4% along with developers and casino operators.
The strong result came as global asset managers rebalanced their portfolios amid a reassessment of the Federal Reserve’s policy stance and the U.S. central bank downplayed the potential of impending interest rate hikes. Asian currencies were hit by the dollar’s prolonged reign, reducing equity returns in the respective markets. As a result, some funds are moving top-performing markets such as Japan and Taiwan to Hong Kong.
Meanwhile, the dollar peg has protected the city’s assets from a sell-off in global markets, with the Hong Kong dollar one of the few Asian currencies to post gains against the greenback last month.
The main trigger is a rotation “where global investors take profits from U.S., Japanese or global technology stocks and invest in Chinese stocks to benefit from a quick recovery,” said Richard Tang, China strategist at Julius Baer Group Ltd. “Traditional is Hong Kong. Equities are seeing greater participation from global investors and this is likely to result in short-term outperformance over the A-share market.”
This contributes to tailwinds such as low valuations and supportive capital markets policies from Beijing. The Hang Seng index trades at just 8.5 times forward earnings, compared to nearly 20 times for the S&P 500 index and 15.7 times for Japan’s Topix index.
On Tuesday, China’s ruling Communist Party vowed to explore new measures to address the ongoing housing crisis, which remains the biggest drag on the country’s economy, and hinted at possible interest rate cuts.
“Politburo talk of policy support is driving a shift in near-term sentiment,” said Matthew Haupt, portfolio manager at Wilson Asset Management. “Investors have had a day to digest the Politburo headlines, and the neutral, non-hawkish Fed is giving room for the rally.”
Chinese investors have been a key driver of Hong Kong stocks recently, with inflows from the mainland accounting for more than a third of total turnover last month, the highest on record. They have bought HK$213 billion ($27 billion) worth of Hong Kong stocks this year, about two-thirds of last year’s total, and had sent net inflows to the city for 22 straight sessions through Tuesday.
But Thursday’s gains suggest the rally has expanded beyond just southbound inflows as global money returns to the financial hub’s cheaply valued market.
“The rapid market recovery since mid-April was initially supported by strong southbound buying. Now it appears a more diverse investor base is joining today’s rally,” said Linda Lam, head of North Asia equity advisory at Union Bancaire Privee. She added that more market-friendly measures to support the Hong Kong market could be introduced in the next few months.
– With support from April Ma and Ishika Mookerjee.
(Updates with closing prices.)
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