Hong Kong stock rally seen as too good to last

Traders work at the Hong Kong Stock Exchange in Hong Kong

Wherever Alex Wong looks, he sees signs that Hong Kong’s stock rebound isn’t going to last.
The Hang Seng Index’s 8.6 percent surge in October came on the lowest trading volume since February. Chinese investors sold more shares in the city than they bought, and small-caps were the worst performing part of the market.
The Hong Kong equity gauge was still down 21 percent from its April peak through Monday after getting squeezed between concern about China and the outlook for U.S. interest-rate increases. The economic slowdown and stock rout across the mainland border curbed demand for more than 500 Chinese companies listed in the city, while the Fed’s plan to increase borrowing costs is weighing on property developers.
“People are extremely cautious,” said Wong, a Hong Kong-based asset-management director at Ample Capital Ltd. “They don’t believe in the rise because many people see this as a bear market rally, and their experience from the last five months has been too bad. A short-covering rally usually has these kinds of characteristics – the rise is very sharp and brief, and not sustainable.”
Companies that had slumped the most led the October rebound, from Macau casino operators to Chinese energy producers. Short-selling as a percentage of turnover slipped, after reaching its highest this year in late September. Short interest as a proportion of shares outstanding averages 0.9 percent on the Hang Seng Index, according to the most recent data available from Markit Group Ltd., with Want Want China Holdings Ltd. and Li & Fung Ltd. among ones with the highest ratio. The Hang Seng Index climbed 0.9 percent at the close yesterday.
“What we’ve seen is short covering so far,” said Adrian Mowat, the chief Asian and emerging market equity strategist at JPMorgan Chase & Co. “There’s a lot of interest in Asia but at the moment it’s not really translating into accounts executing and putting the big buy orders on. The question is whether you can persuade the global accounts to start to return to emerging markets.”
U.S. exchange-traded funds that buy emerging-market stocks and bonds are still recovering from outflows of USD12.4 billion in the third quarter. A total of $2.58 billion flowed into the developing-nation ETFs in the first three weeks of October, the longest winning stretch since May.
A measure of small-cap shares on the Hang Seng Composite Index climbed just 6.1 percent in October, compared with an 8.6 percent gain for the biggest companies and a 28 percent surge in April. In mainland markets, the pattern was reversed, with the Shanghai Composite Index climbing 11 percent and the ChiNext index soaring 19 percent. By the end of October, Chinese investors had an extra 1.4 billion yuan ($221 million) of quota left to buy Hong Kong securities via the city’s Shanghai exchange link. The balance rises when investors sell shares.
China’s multiple cuts to interest rates and bank reserve requirements have helped stabilize growth and sentiment, which should drive equities higher toward the year-end, according to ReOrient Group.
“I’m sure a lot of the gains are because of short covering and some investors reducing underweight positions,” said David Welch, head of equity sales trading at ReOrient Group in Hong Kong. “But I think it’s the start of a multi-month rally so I’m convinced in that regard. China goes up, it takes Hong Kong along for the ride.” Kana Nishizawa, Bloomberg