Should you invest in Hong Kong?
A huge slump in a long-term star market should draw bargain hunters – but Hong Kong has changed.
Hong Kong has delivered spectacular returns for investors over the long term. In the 50 years or so since the rapid industrialisation began feeding through to rising wealth, the stock market has far outstripped both Singapore – which has been a huge success in its own right – and global markets as a whole.
Its unique status as a trade and investment gateway to China, while operating under very different economic and social conditions to the mainland, gave it a second wind from the 2000s even after its own high growth phase began to tail off. The market has been hugely volatile, but up until 2019, history showed that it was worth staying the course.
Yet ever since widespread anti-government protests that year and the subsequent imposition of laws that curbed civil liberties and eroded Hong Kong’s autonomy, that has looked far less certain. Over the last three years, the index is down by more than 30% (including dividends).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
What is the outlook for Hong Kong investment?
To say there is a great deal of pessimism around Hong Kong is an understatement. The market has recovered from slumps before – look at the Asian crisis in 1997 in the chart – but this feels like something new. Optimists such as Mark Mobius are firmly in the minority. The consensus is more that “Hong Kong is over”, as economist Stephen Roach – once a long-term bull on China – put it earlier this year.
The recent resignation of two British judges who served on Hong Kong’s Court of Final Appeal reflects fears that trust in the legal system has been badly damaged by the prosecution of opposition politicians and activists under new national security laws. “Hong Kong, once a vibrant and politically diverse community is slowly becoming a totalitarian state,” wrote one of them, Jonathan Sumption, in the Financial Times this week.
“The rule of law is profoundly compromised in any area about which the government feels strongly.” (In a holdover from Hong Kong’s past as a British colony, several foreign judges sit on the top court, which was seen as helping to ensure the legal system stayed in line with other English common-law jurisdictions.) With many investors turning their backs on Hong Kong, the market seemingly looks cheap.
The MSCI Hong Kong trades on 12 times forecast earnings; the Hang Seng benchmark – which also includes large mainland stocks as well as local ones – is even lower. Skim through mid-caps and small caps and some look startlingly undervalued. The index has rallied since the January lows – it’s up about 20% since the bottom – but that seems to be driven by inflows from mainland Chinese investors, who tend to favour specific companies.
Unless greater optimism about China causes foreign investors to return, it seems likely that Hong Kong’s market – like the territory itself – will become more closely integrated into the mainland, which might suggest intermittent (volatile) demand for major stocks with strong mainland links and much less support for others, regardless of how cheap they get. Right now, it is difficult to see what catalyst could change that.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.
Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.
He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.
-
Chase to cut savings rate after base rate reduction – is it still a best-buy?
Chase’s popular saver is linked to the base rate, meaning its rate will come down this week after the Bank of England’s recent move. Is it still a best-buy account?
By Katie Williams Published
-
Sri Mulyani Indrawati: Indonesia’s Iron Lady
Keeping Sri Mulyani Indrawati on as Indonesia's finance minister has steadied the ship after the election of a former military general spooked financial markets
By Jane Lewis Published
-
Sri Mulyani Indrawati: Indonesia’s Iron Lady
Keeping Sri Mulyani Indrawati on as Indonesia's finance minister has steadied the ship after the election of a former military general spooked financial markets
By Jane Lewis Published
-
How investors can use options to navigate a turbulent world
Explainer Options can be a useful solution for investors to protect and grow their wealth in volatile times.
By James Proudlock Published
-
Are Chinese consumer brands challenging global chains?
A new wave of Chinese consumer brands is starting to push out into global markets. Complacent Western giants are not nearly ready for the threat that they pose
By Matthew Lynn Published
-
Japan enters an era of political instability
The result of the general election in Japan has thrown the country into uncertain times, politically
By Emily Hohler Published
-
Invest in Hilton Foods: a tasty UK food supplier
Hilton Foods is a keenly priced opportunity in an unglamorous sector
By Dr Matthew Partridge Published
-
HSBC stocks jump – is its cost-cutting plan already paying off?
HSBC's reorganisation has left questions unanswered, but otherwise the banking sector is in robust health
By Dr Matthew Partridge Published
-
Lock in an 11% yield with Sabre
Tips Sabre, a best-in-class company is undervalued due to low profits in the motor insurance industry. Should you invest?
By Rupert Hargreaves Published
-
Will turmoil in the Middle East trigger inflation?
The risk of an escalating Middle East crisis continues to rise. Markets appear to be dismissing the prospect. Here's how investors can protect themselves.
By Philip Pilkington Published