Beware Buyer's Remorse as Hong Kong's Retail Stocks Surge

(Bloomberg) -- Fueled by a sizzling economy and a cheaper local currency, Hong Kong’s retailers are back in fashion with investors -- despite familiar warning signs for those who have been here before.

Consumer companies helped lead Hong Kong’s recovery from this year’s market rout. Cosmetics seller Sa Sa International Holdings Ltd. and jeweler Luk Fook Holdings International Ltd. are among the top gainers for local companies on the Hang Seng Composite Index, outperforming the broader gauge by more than nine times since the index hit its bottom this year on Feb. 9. An on-year jump in retail sales and an increase in shoppers from mainland China in the first quarter have powered earnings.

Beware Buyer's Remorse as Hong Kong's Retail Stocks Surge

Investors have seen this before -- retail sales surged from 2010 to 2014 before slumping as China’s currency tumbled, a sinking stock market slowed consumer spending and China’s campaign on corruption chilled desire for luxury goods. It’s a similar picture this time, according to Asset Management One, which sees beneficial currency tailwinds reversing in the second half of the year as China’s yuan weakens against the dollar, making Hong Kong goods less cheap for mainland shoppers.

“Currency moves may have helped but that’s not something that is expected to continue,” said Toshihiko Takamoto, a Singapore-based money manager at Asset Management One. “Some of those stocks are getting the spotlight because they’ve been ignored for a while -- it’s more of a cyclical boom rather than a structural change to Hong Kong’s tourism industry.”

While Goldman Sachs Group Inc. more than doubled its estimate on Hong Kong retail sales growth for this year, it’s sounding long-term caution. Mainland tourist spending could be capped by holidaymakers shifting to experiences beyond shopping, and competition from other destinations, it said.

Rate Risk

Then there’s the specter of rising borrowing costs threatening the local housing market and slowing spending in Hong Kong, which last week reported its fastest economic growth since 2011 in the first quarter -- in part on resilient property prices.

Hong Kong’s rates have lagged behind those in the U.S. despite the city’s currency peg to the dollar, thanks to an abundance of liquidity, fueling gains in property prices.

“But how long can this story continue to last, especially for the second half of the year?” said Ken Wong, a Hong Kong-based Asian equity portfolio specialist at Eastspring Investments. If borrowing costs rise, “that could have a bit of a damper on what we’ve seen. We haven’t seen that yet, and hence that’s why the first quarter tended to be so good -- for the economy, landlords and for some of the higher end goods.”

Analysts are optimistic about Sa Sa, projecting its earnings to grow for the first time since 2014 this fiscal year as the stock trades near its highest in more than three years. The world’s biggest listed jeweler Chow Tai Fook Jewellery Group Ltd., whose shares are up 26 percent this year, is expected to report its biggest increase in yearly profit since 2012. The company said last month its same-store sales in Hong Kong and in Macau grew 17 percent on year in the first quarter. Both firms are expected to report results next month.

Sa Sa sank 4.6 percent on Friday, while Luk Fook slipped 0.7 percent. The Hang Seng Composite Index rose 0.3 percent.

Beware Buyer's Remorse as Hong Kong's Retail Stocks Surge

Some investors are betting Hong Kong’s retail boom will be durable, driven by rising Chinese disposable incomes. But the yuan has weakened against the dollar since hitting to a 2 1/2-year high in April. Hong Kong’s stock market has stalled since reaching a record high in January, dragged down by global volatility in technology shares and China-U.S. trade tensions.

Retailers also face higher rental costs. Shopping mall landlord Hysan Development Co. said it expects to raise rent for more than 80 percent of tenants renewing their leases, the Hong Kong Economic Times reported in March, citing the company’s chief financial officer.

While the property market isn’t slowing, banks are moving away from popular fixed-rate mortgages in anticipation of a more expensive environment.

“There’s been wealth effect from Hong Kong’s high housing prices,” said Shen Jianguang, chief Asia economist Mizuho Securities in Hong Kong. “If that starts to adjust, that would have a big impact on retail sales.”

©2018 Bloomberg L.P.