Record-Breaking Hong Kong Stocks Have Room to Keep Climbing

(Bloomberg) -- Hong Kong stocks have carried on past their best-ever close to hit their highest level on record.

The Hang Seng Index climbed 0.3 percent to 31,983.41 on Wednesday, erasing an earlier loss and topping the previous all-time intraday high of 31,958.41 reached in October 2007.

To JPMorgan Chase & Co.’s private bank, there are plenty of reasons this rally has further to run. For one, the city’s equity market -- the world’s fourth-largest -- has spent most of the years since the global financial crisis lagging major peers. The bursting of China’s stock bubble and a plunging yuan in 2015 in particular undermined investor confidence. By the end of 2016, the Hang Seng Index was at its lowest level relative to the S&P 500 Index in 13 years.

Since then, Hong Kong’s equity gauge has outperformed most major benchmarks as a steadier Chinese economy bolstered the outlook for corporate earnings and mainland investors pumped cash into the city’s shares. Even after a 45 percent rally since the start of 2017, the index trades at a 34 percent discount to MSCI’s global gauge.

“Look at the overall scheme of things: we have had -- how many years of downtrend? Almost eight or nine years,” said Raymond Cheng, Hong Kong-based head of Asia equity strategy at JPMorgan’s private bank unit. “Yes, last year we had a big rally, but it’s well-justified in my mind by the earnings pick-up.”

Here are five charts illustrating the bull case for Hong Kong stocks:

1. Global Laggard

Hong Kong shares have lagged the U.S. rally since the Standard & Poor’s 500 Index bottomed out in 2009 amid unprecedented monetary easing. The divergence deepened in 2015, when Hong Kong stocks were battered by the Chinese market’s epic bust.

Hong Kong large caps, many of which are financial companies, benefit more from the later stages of the economic cycle than their U.S. peers, according to Hao Hong, chief strategist at Bocom International Holding Co. in Hong Kong.

2. Comparatively Cheap

Hong Kong shares have been cheaper than most major developed or emerging markets for years. To JPMorgan’s Cheng, that means there are still a lot of “low-hanging fruit,” especially among H shares.

3. Southbound Inflows

Chinese stocks in Hong Kong remain cheaper than their mainland-traded counterparts. That’s helped draw mainland inflows since an exchange link began in 2014.

“There will be new highs,” said Bocom’s Hong. “As long as the valuation gap between A and H still exists, as long as the connect program is open, the money should come this way.”

4. Regular Turnover

Turnover started rising late last year, but remains below levels in 2007 and 2015. This may not be a bearish sign, as falling trading is a global trend and a long-term structural problem for the Hong Kong market, said Hong.

5. Dollar Slump

The dollar index’s recent slump to a three-year low is another sign synchronized global growth is luring funds away from U.S. assets. With overseas active investors still underweight on offshore Chinese stocks last year, according to Goldman Sachs Group Inc., steady expansion in Asia’s largest economy could draw more funds to Hong Kong shares.

--With assistance from Philip Glamann

To contact the reporter on this story: Justina Lee in Hong Kong at jlee1489@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Will Davies

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