Inverting Hong Kong Yields Signal More Hang Seng Pain: Jefferies

(Bloomberg) -- With the U.S. yield curve coming close to inverting, so is Hong Kong’s thanks to its currency peg to the dollar. That signals more downside for the benchmark Hang Seng Index, which fell into a bear market this month, according to Jefferies strategists.

“While a Hong Kong inverted yield curve is not unheard of, it has generally preceded Hang Seng Index market peaks,” analysts led by Sean Darby, chief global equity strategist at the brokerage, wrote in a Sept. 17 note. “The Hong Kong equity market is facing higher domestic real rates, an inverting yield curve and ongoing contraction in the Hong Kong aggregate balance. We remain modestly bearish.”

Inverting Hong Kong Yields Signal More Hang Seng Pain: Jefferies

Alongside this measure, Darby observes a few more “well-founded” investment rules for Hong Kong’s economy, given its currency peg:

  • There’s little correlation between changes in the monetary base and share prices. In the case of Hong Kong this may be because of changes in loan growth and asset diversification
  • Since 2006, there’s been a strong inverse correlation between changes in the Hong Kong yield curve and the premium of China A shares over Hong Kong H shares
  • There is a modest negative relationship between 3-month Hibor and China-Hong Kong flows -- a higher Hibor tends to be correlated more with northbound flows
  • Regardless of the Hong Kong rate cycle, since 2006 the CSI 300 Index dividend yield has rarely been higher than the Hang Seng’s forward dividend yield

©2018 Bloomberg L.P.