It's a Different Beast That Underpins Hong Kong Stocks

(Bloomberg Gadfly) -- After a 14-day run, Hong Kong's Hang Seng Index on Monday came close to breaking through its historical record set more than a decade ago. Technical analysts now caution the benchmark looks overbought.

It's a Different Beast That Underpins Hong Kong Stocks

Its strength, however, shouldn't be surprising. That's because the Hang Seng today isn't what it was a decade ago.

One of the most conspicuous changes has been the arrival of real technology companies. On Oct. 30, 2007, China Mobile Ltd. was the biggest elephant in the room, with a 15 percent index weighting. Today, that's Tencent Holdings Ltd.

It's a Different Beast That Underpins Hong Kong Stocks

Two things have happened since Tencent's arrival.

The Chinese tech giant has an excellent track record, raising the profile of the Hang Seng Index. Tencent investors have been well rewarded since the company debuted in 2004; even the 14.8 percent loss they weathered in 2008 wasn't that bad considering the financial crisis. And because Tencent is adept at spinning off and floating its various subsidiaries, we can be confident it won't fall into the conglomerate discount trap of Japan's SoftBank Group Corp.

It's a Different Beast That Underpins Hong Kong Stocks

Also, because of Tencent's large presence, the influence of Chinese state-owned enterprises has receded. Ten years ago, SOEs accounted for roughly half of the Hang Seng Index versus about one-third now. That's a good thing, because SOE bosses' interests aren't always aligned with shareholders. In March 2010, China Mobile purchased a $5.8 billion stake in Shanghai Pudong Development Bank Co., making some wonder what kind of synergies could possibly spring from that pairing.

Old-school banks and insurance stocks are expected to play a more active part this year, too.

In the past, a drop in Chinese onshore bond yields put a squeeze on insurers' net assets, because insurance companies' liabilities, particularly their life policies, tend to have a longer duration than their investment holdings.

As China deleverages, onshore bond yields have risen as liquidity dries up -- a positive for financial firms. Since January, about half of the Hang Seng's 5 percent increase has been thanks to banks and insurance companies.

It's a Different Beast That Underpins Hong Kong Stocks

When Hong Kong stocks were undergoing a correction late last year, I was a bull, saying the index could go back above 30,000 in no time. Now, it's sitting tight above 31,000.

Valuations aside, much of this has to do with the southbound liquidity train. Over the past 12 months, mainland Chinese investors have poured more than HK$335 billion ($43 billion) into Hong Kong stocks via the Shanghai and Shenzhen stock-trading links. Those tunnels weren't around in 2007.

While overbought signals are certainly worth keeping an eye on, it's equally important to remember that this is 2018, and the Hang Seng is a very different beast.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Gadfly columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

To contact the author of this story: Shuli Ren in Hong Kong at

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