The worst may have come to pass for Hong Kong as one of the world’s worst-performing equity markets this year.
Key factors that will define the direction Hong Kong equities are heading in 2022 include: China’s emphasis on stable economic growth, the implementation of regulation, domestic consumption, interest rates both domestically and on Wall Street, as well as Hong Kong’s border reopening with the Chinese mainland.
“Even if there are still so many uncertainties around regulations, just purely [based on the theory of] mean reversion, there is still upside for the Hong Kong equity market,” said June Chua, portfolio manager and co-head of Asia and emerging market equities at Lombard Odier Investment Managers (LOIM).
“I think possibly the worst could be behind us in terms of regulation, and I think what the government wants to be done has probably been voiced out. So it's a case of implementation.
“Given that most of it has been priced into the market, next year when we all start fresh, I think people will start to take a look again,” Chua said. “What would derail that outlook is regulation… But if we are not seeing any more severe crackdowns, growth should normalise, and they should be recovering.”
HIGH ON THE LIST
Across all Asian equity markets excluding Japan, Chua thinks Hong Kong and onshore China will be good performers in 2022 as valuations normalise. Since the Chinese authorities have emphasised economic growth and hinted at stimulus measures during the just-concluded Central Economic Work Conference, she believes the stock market will be supported by stimulus policies.
She is positive about a selection of names in the internet and domestic consumer sectors that have good fundamentals.
“I think the internet sector is not something you completely forget,” Chua said. “We may not in the short term see them go back to high earnings growth levels of like 30% or 40% per year. But if you ask me, looking around the region for companies that can consistently do mid-teens to low 20s, I think that's very commendable. So we think business models that are more unique with less competition will probably do slightly better,” Chua said.
She’s also positive about hardware technology, but tends to be more selective on renewables as valuations are already very expensive.
On global inflation and interest rate hike concerns, Chua believes high growth names that don't make profits will be affected. The Chinese central bank’s potential interest rate cut could put pressure on the performance of financials, she added.
Meanwhile, Odile Lange-Broussy, LOIM's portfolio manager and co-head of Asia and emerging markets equities, thinks domestic tourism recovery will drive decent performance of selected Chinese companies.
Carrying on from the base effect of 2021, the first quarter of 2022 could continue to be tough as flagged by a number of companies in their recent outlook, according to Broussy. But further into 2022 as things gradually recover, domestic consumption and tourism businesses should be in good shape, she said.
Broussy also believes the digital marketing and online advertising business of big internet names will continue to enjoy decent growth, as advertising is key in large brands' business development strategy.
In 2021, US stocks rallied throughout the year despite inflationary and pandemic concerns, with three major indices gaining as much as 24% year to date. Even for onshore China, with the economic slowdown, certain sectors have performed well enough to drive Shenzhen and Shanghai indices up by 5%.
Meanwhile in Hong Kong, the Hang Seng Index dropped by 14%, the Tech Index slumped more than 30%, and the China Enterprises Index lost more than 22% year to date, as these indices contain hard-hit sectors affected by Chinese regulatory crackdowns, including technology, internet, and property.
Source: Bloomberg, MSCI, Robeco
But compared to the onshore A-shares market, some experts still see less promise in Hong Kong in 2022.
“I prefer A-shares versus H-shares for two reasons. One is that there are many more Chinese small- and mid-sized enterprises (SMEs) listed on the onshore market, while Hong Kong consists of mainly big names. SMEs are a major force behind China’s economic growth,” said a Greater China-based chief investment officer of a large life insurance company.
“The second is that Hong Kong stocks are put in an awkward position. They suffer negative news from both onshore and offshore markets, while A-shares are less sensitive to overseas fluctuations,” he added, noting that this is his personal view.
Similarly, Robeco takes a constructive position for onshore Chinese equities, while being neutral towards Hong Kong next year.
On the positive side, a potential rate hike in the US can benefit the earnings of large-cap Hong Kong financials in 2022. “But on the other hand, a lot of sectors [listed in Hong Kong] depend on the border opening up with China. There obviously are still uncertainties there. Even if we initially open up, how long would it take before we go back to a business-as-usual situation? It's still hard to say,” said Vicki Chi, portfolio manager for Asia Pacific equities at Robeco during its recent 2022 outlook webinar.
As regulation overhauls continue, companies in Hong Kong need to work harder on things like corporate governance and the protection of minority shareholders, in order to address their longstanding low valuations versus other markets, Chi stressed.
With Didi’s US delisting and plans to refile in Hong Kong; and US sanctions over Chinese companies such as SenseTime, which still has a Hong Kong initial public offering (IPO) lined up despite a delay; the general homecoming trend is believed to help boost Hong Kong’s stock market in 2022.
Noting that the Hong Kong Stock Exchange is going to implement new dual-primary listing and secondary listing requirements on the first day of 2022 to encourage more homecomings, Billy Au, corporate and securities partner at Mayer Brown, said they’ve started to get more inquiries on planned dual primary or secondary listings in Hong Kong in the new year.
The implementation of regulations such as data security scrutiny on internet companies is more about them spending more resources on due diligence and reporting, rather than dealbreakers for their IPOs, Au said.