Yuan Rally Gives Hong Kong Stock Traders Another Reason to Buy

(Bloomberg) -- Valuations have jumped, earnings estimates are up, and forecasters are raising their targets on Hong Kong’s stock market, which has gone from pariah to darling in under half a year.

While investors around the world consider how a strengthening yuan could boost economic growth, the impact is increasingly felt in a city that is entwined with Chinese demand and global risk-on sentiment. Hong Kong shares have gained 11% since a low on Dec. 4, adding $579 billion to market values through Monday and pushing the index back to the level it was trading at last year before political protests escalated.

Before becoming one of the world’s best performers in the past six weeks, the city’s equities were among 2019’s weakest as the unrest plunged Hong Kong into a recession.

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The Hang Seng Index closed down 0.2% Tuesday following three days of gains, easing with mainland equities. Buying momentum in Hong Kong has pulled back from overbought territory hit earlier in January while market valuation is close to its 10-year average.

Though there could be a near-term pause for Hong Kong equities as the initial trade deal between the U.S. and China -- which has been boosting risk assets globally -- is due to be signed Wednesday, “we are still upbeat on stocks given the solid volumes lately and news stream,” said Linus Yip, chief strategist at First Shanghai Securities.

The Hang Seng Index, on pace for what would be its first seven-week run of gains since January 2018, has been supported by a number of factors, including cooled local tensions and signs that China’s economy is stabilizing. Meanwhile, the Hong Kong dollar has been rallying and there’s been renewed love for former favorites like Tencent Holdings Ltd., which is at its best since mid-2018 and has made up nearly one-quarter of the Hang Seng Index’s advance since the start of December.

It’s all adding up to what Jefferies Financial Group Inc. strategists on Monday called a period of triple short-covering.

Mainland investors are behind the wave of buying, too. There’s been net purchases of Hong Kong equities via exchange links with Shanghai and Shenzhen every month since March, and flows have been strong to start 2020. Sentiment has been boosted in part by the yuan getting to its strongest level versus the U.S. dollar since July as trade tensions have cooled.

--With assistance from April Ma.

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net

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

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With assistance from Bloomberg