Hong Kong Recession Means Stocks May Fall 25%, Oreana Says

(Bloomberg) -- Hong Kong stocks still aren’t cheap enough despite just finishing their worst quarter in four years.

So contends Oreana Financial Services Ltd.’s Isaac Poole. The company’s chief investment officer, who last September correctly predicted a rally in Chinese stocks, told Bloomberg TV there is an economic recession underway in Hong Kong that investors haven’t priced in. He sees the Hang Seng Index losing as much as 25% by the end of 2020, according to emailed comments.

The Hang Seng Index is trading near where it began the year. But the trade war, global growth concerns and ongoing street protests in the city mean stocks are still too expensive, Poole said. The index trades at about 9.9 times its members’ projected earnings, 11% cheaper than its five-year average.

“This is a bad outlook that’s not being priced in properly into equities at the moment,” said Poole. “That’s not a technical recession, that’s an absolute recession. We look at the equity market here in Hong Kong and seeing it probably 15% to 20%, maybe 25%, overvalued right now.”

His view contrasts with that of analysts in a Bloomberg survey who say attractive valuations, easing trade tensions and stimulus measures from Beijing will help lift the Hang Seng Index to about 28,000 by year-end. The Hang Seng Index rose 0.3% Thursday to close above the key 26,000-point level.

Poole does not share such optimism. The city’s economy is showing the strain of months of protests. Retail sales plunged a record 23% year-on-year in August.

“There’s not a lot of positive news for earnings,” Poole said. “And yet when we look at the Hang Seng, it looks like it’s still pricing in reasonable earnings growth, and that’s just not likely to come through.”

--With assistance from Yvonne Man and Selina Wang.

To contact the reporter on this story: Elena Popina in New York at epopina@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David Watkins, Kevin Kingsbury

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