Markets | Hong Kong stocks seen losing haven appeal on Fed move, yuan

An investor sits in front of a monitor displaying share prices at a securities brokerage in Hong Kong

Hong Kong investors who sought shelter from China’s rout in local shares say the clock is running out on that trade.
While a gauge of Hong Kong stocks has fallen since the end of April, the decline is less than half that of a measure of Chinese shares listed in the city. Hong Kong’s currency peg to the dollar means the expected rate increase by the Federal Reserve will weigh on the city’s developers, says HSBC Holdings Plc. Morgan Stanley says yuan depreciation will hurt retailers.
The role of local shares as a haven in the China selloff made the MSCI Hong Kong Index the most expensive since November relative to the measure of mainland stocks. Pictet Asset Management Ltd. and HSBC say that’s another headwind for homegrown shares, especially as investors bet on further stimulus on the mainland.
“If the rate rise comes in, MSCI Hong Kong has property companies so they will be impacted,” said Herald van der Linde, the Hong-Kong based head of Asia-Pacific equity strategy at HSBC. “Hong Kong may look a little bit less exciting then, and by that time maybe China is cheaper. In the longer run the Chinese companies will outperform.”
The MSCI China Index is a measure of 144 mainland stocks mostly trading in the former British colony. China Mobile Ltd. accounts for 9 percent of the gauge, whose smallest company has a market value of about USD2 billion. The MSCI Hong Kong gauge comprises 40 stocks from the city and Macau, with AIA Group Ltd. making up about about 19 percent of the index. MSCI China slid 0.6 percent yesterday, while the Hong Kong gauge retreated 0.8 percent.
Hong Kong investors turned to local companies as the rout in mainland A shares destroyed about $4 trillion in market value. Hang Seng Bank Ltd. and Cheung Kong Infrastructure Holdings Ltd., which gets most of its sales outside the mainland, were among a handful of Hong Kong shares that rose even in the selloff.
Macquarie Investment Management Ltd. made the shift in April after taking profit from Chinese companies it had favored for seven years. Hong Kong shares tend to be more defensive, which probably attracted investors during volatile conditions, said Sam Le Cornu, who oversees about $3 billion in Asian equities.
Traders see a 48 percent chance that the U.S. will raise interest rates next month. That would translate into higher mortgage costs in a city where property companies make up about a quarter of the MSCI Hong Kong measure.
China’s surprise devaluation will hurt the city’s retail industry by reducing the purchasing power of mainland tourists, who account for as much as half the sales at luxury malls, Morgan Stanley wrote in a report.
Local companies probably won’t see sharp rallies for the rest of the year because valuations are at a premium to the MSCI China, Dan said. The MSCI Hong Kong traded at 15.8 times estimated earnings at the end of last week, compared with 10.3 for the mainland gauge.
The yuan’s devaluation will ease deflationary pressure and be good for Chinese equities, according to Nomura Holdings Inc. If it increases capital outflow, the government will cut the ratio of reserves lenders must set aside for the deposits they hold, the brokerage said in a report.
Investors will become more confident in the Chinese economy and “buy those oversold China shares,” said Ben Kwong, a director at brokerage KGI Asia Ltd in Hong Kong. “With the interest-rate hike and slowing economy, Hong Kong will face increasing challenges.” Kana Nishizawa, Bloomberg