From leading the market at the beginning of the year to leading the decline at the end, the Hong Kong stock market experienced a liquidity crisis. However, with the repurchase of shares by listed companies, measures introduced by Hong Kong to revitalize market liquidity, and the Federal Reserve's shift towards a "dove" stance, its liquidity issues are expected to be alleviated.
In the middle of the last month of 2023, the Hang Seng Index fell below 16,000 points, setting a new low for the year. At the start of 2023, the Hang Seng Index had carried investors' expectations of "leading the global market." These expectations were not without a basis in reality. During a rebound in the fourth quarter of 2022, the Hong Kong stock market was at the forefront of the recovery. From the end of October 2022 to before the Spring Festival in January 2023, the Hang Seng Index rebounded from 14,597.31 points to 22,700.85 points, with an interval increase of 52.65% in just three months. The technology heavyweight Tencent Holdings rebounded from a price of HKD 198.60 per share to HKD 416.60 per share, with an interval increase of 101.26%, becoming one of the most actively traded stocks in the Hong Kong market at that time.
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Such good performance was completely eroded in the subsequent months of 2023. As the year-end approached, the Hang Seng Index created a record of four consecutive years of decline, which was the first time in the history of the Hong Kong stock market. On December 11th, the Hang Seng Index broke below 16,000 points, setting a new low for the year. Subsequently, the Hong Kong stock market began to rebound, and on the last trading day of 2023, the Hang Seng Index regained 17,000 points, closing at 17,047.37, with a year-end decline of 13.82%, marking four consecutive years of decline for the Hang Seng Index.
In 2023, among the 14 major global capital market indices, the Hang Seng Index ranked last with a full-year decline of 13.82%; the second to last was the Shenzhen Component Index, with a full-year decline of 13.54%; and the Shanghai Composite Index was third from the bottom, with a full-year decline of 3.70%.
"The economic recovery not meeting expectations is one aspect, and another important reason is the lack of liquidity," said Chen Da, Managing Director of Fuchun Mountain Capital (Hong Kong), in an interview with Caijing. Public data shows that the turnover of the Hang Seng Index from the beginning of the year to date is only about 80% of that of 2022. Additionally, according to data from the Hong Kong Stock Exchange, the financing scale of the Hong Kong stock market in 2023 fell below HKD 130 billion, with the rate of new share issues breaking issue price remaining above 30%.
In 2023, the yield on ten-year U.S. Treasury bonds continued to hit new highs, also leading to capital outflows from the Hong Kong stock market. However, market expectations suggest that a global liquidity inflection point is forming. In the early morning of December 14th, Federal Reserve Chairman Powell made a rare clear statement: interest rate cuts have begun to come into view, and policymakers are considering and discussing when it would be appropriate to cut interest rates.
Ping An Securities believes that the current valuation of the Hong Kong stock market compared to A-shares is already quite significant, with the "Hang Seng Shanghai Shenzhen Hong Kong Stock Connect AH Premium Index at a 99% high level over the past five years." Comparing companies listed in both A and H shares, the average dividend yield (over the past 12 months) of H-shares in 2023 is 5.7%, while the average dividend yield of A-shares during the same period is 3.2%, giving the Hong Kong stock market a valuation advantage.Why the Continuous Decline?
In 2018, the Hang Seng Index reached a historical high of 33,484.08 points over a decade, surpassing the peak of the 2007 bull market. Five years later, the Hang Seng Index has plummeted to around 17,000 points, a 48.58% retracement from its former high.
During these five years, numerous black swan events have occurred, such as the China-U.S. trade friction, the COVID-19 pandemic, and the Russia-Ukraine conflict. Chen Da believes that under such an international environment, foreign capital has exercised a "veto" on the Hong Kong stock market: "In recent years, some long-term foreign capital in the Hong Kong market, such as sovereign funds and various national pension funds, have not considered valuation from an investment perspective but have taken geopolitical considerations into account."
Foreign capital has increased the discount factor for the Hong Kong stock market in valuation models, effectively excluding the market from investment portfolios. "No matter how good a company is, even Apple, if the discount factor is high, the calculated intrinsic value will be reduced, making the investment 'lose attractiveness.' Raising the discount factor is equivalent to a 'gentle rejection' of the Hong Kong stock market," Chen Da stated. This "gentle rejection" has led to a liquidity crisis in the Hong Kong stock market for a period.
In 2023, the total turnover of the Hong Kong stock market was about 25 trillion Hong Kong dollars, a decrease of about 20% compared to the 30.69 trillion Hong Kong dollars in 2022, which is equivalent to an 80% discount on the entire market's liquidity. The Hang Seng Index also fell by about 13% within the year, close to a 20% decrease, making the liquidity crisis one of the most important factors for the index's decline.
Chen Da revealed that, in fact, the IR (Investor Relations) departments of many Chinese companies listed overseas have sought communication with large foreign institutions, believing that the companies have abundant cash flow and good blood-making capabilities, and are currently undervalued, making it a good time for allocation. However, some institutions still refuse on the grounds of liquidity, "Large institutions generally have a minimum liquidity threshold requirement for stock targets when building positions; otherwise, they will face two major problems. First, building a position immediately raises the stock price and increases costs, making it difficult to buy enough positions at a certain price. Second, it is difficult to exit later. If considered from this perspective, it has nothing to do with the company's fundamentals; it is a veto at the market liquidity level."
(Performance of Wind Hong Kong Secondary Industry Indexes year-to-date)
In addition to the impact of liquidity, the real estate industry, which has a high weight in the Hang Seng Index, continues to "defuse risks," and the reduced expectation of economic recovery has led to poor performance in the retail industry, also affecting the full-year performance of the Hang Seng Index. Among the Wind Hong Kong Secondary Industry Indexes, the Hong Kong Real Estate Index fell by about 27.75% for the year, ranking fourth from the bottom among the 24 secondary industry indexes; the Hong Kong Retail Industry fell by 28.97% for the year. Among other industries with larger market values, the food and beverage sector also saw a decline of more than 20%. Only five of the 24 industry indexes had positive gains for the year, with the remaining 20 industry indexes all in decline.
(Top-performing stocks in the Hong Kong Stock Connect this year)
In terms of individual stocks, the ones with the highest gains in the overall Hong Kong stock market are basically micro-cap stocks with a market value of no more than 1 billion yuan, and their small turnover does not have much impact on the market. Among the Hong Kong Stock Connect stocks with larger turnover and better liquidity, Meitu Company, with a market value of 16.1 billion Hong Kong dollars, ranked first with a year-end increase of 165.35%, followed by China Guangdong Nuclear Mineral Resources and Gao Wei Electronics in the second and third places. The largest decline in the Hong Kong Stock Connect was Dingfeng Group Automobile.(The Most Heavily Declined Stocks in Hong Kong Stock Connect This Year)
Despite a rebound in Hong Kong stocks approaching the end of the year, on December 27th, the market still saw three stocks experience a flash crash with declines exceeding 80% during the trading day, specifically, Hong Qiang Holdings plummeted nearly 94%, Qi Shi Da fell by 90%, and Meng Dong Fang dropped over 87%. None of these three stocks rebounded for the remaining trading days of 2023.
A Potential Liquidity Inflection Point
To address the liquidity crisis, listed companies on the Hong Kong stock market have initiated a wave of share buybacks. Data indicates that as of December 13th, the amount of share buybacks in the Hong Kong market this year exceeded 113.3 billion Hong Kong dollars, surpassing the 102.9 billion Hong Kong dollars of 2022, setting a historical record, with 187 companies actively participating in buybacks.
A typical case is Tencent Holdings. Starting from the middle of 2022 when the major shareholder announced a reduction, Tencent Holdings increased its buyback efforts. Wind data shows that Tencent Holdings had nearly 200 buyback records throughout the year. Initially, the average cost per buyback by Tencent Holdings was around 350 million Hong Kong dollars, which increased to about 400 million Hong Kong dollars starting from June 2023, and after the decline on December 22nd, this figure has expanded to 1 billion Hong Kong dollars.
According to rough calculations by Caijing, Tencent Holdings has spent over 70 billion Hong Kong dollars on buybacks. On December 22nd, Tencent Holdings plummeted by 12.35%, and the stock price rebounded slightly in the following trading days. The company's stock price has fallen by about 6.79% year-to-date, outperforming the Hang Seng Index.
Some institutional investors analyze that for companies with good financial conditions and the ability to implement buybacks, actively conducting buybacks reflects a judgment that their stock prices are undervalued and demonstrates confidence in future development. From the experience of overseas mature markets, share buybacks by listed companies have a positive effect on improving stock returns and promoting stock price increases, and also help to boost investor confidence.
At the same time, the Hong Kong government is also gradually introducing measures to revitalize the liquidity of the Hong Kong stock market. On November 15th, the Legislative Council of the Hong Kong government passed the "Stamp Duty (Amendment) (Securities Transfer) Bill 2023," which reduced the stamp duty rate for buying and selling stocks from the current 0.13% to 0.1%.
In addition, Hong Kong Exchanges and Clearing (HKEX) Chief Executive Officer Nicolas Aguzin recently introduced to Caijing that there will be a series of measures to improve the liquidity of Hong Kong stocks, including normal trading during severe weather, reducing market data service fees for mobile devices, optimizing the rules for listed companies' buybacks, reducing the minimum price fluctuation unit of Hong Kong stocks to narrow the trading price spread, and enhancing the international appeal of Hong Kong listings.
Chen Da believes that Southbound Hong Kong Stock Connect or domestic capital may become the main focus for solving the liquidity issues of Hong Kong stocks in the future. "The deep-seated reason for the liquidity problem is whether there is new capital to take over after part of the funds leave? Who will fill the vacuum of capital?"Ping An Securities' research indicates that the transactional strength of Southbound capital has been gradually increasing in recent years, with an average monthly turnover ratio of about 28% in 2023.
Nicolas Aguzin, CEO of HKEX, stated that the exchange is also cooperating with mainland China to continuously optimize the Shanghai-Shenzhen-Hong Kong Stock Connect mechanism, ensuring the two-way flow of capital. This year, HKEX introduced the "Hong Kong Dollar-Renminbi Dual Trading Counter Model" in the Hong Kong stock market, with 24 Hong Kong stocks having added Renminbi counters, and more may follow in the future. "We hope that the Renminbi counters can also be included in the Hong Kong Stock Connect in the future, allowing mainland investors to trade Hong Kong stocks priced in Renminbi, which would make transactions more convenient and help promote more trading."
Fortunately, the liquidity concerns widely feared by the market are expected to reach an inflection point. In the early morning of December 14th, Powell signaled a shift towards a "dove" stance, indicating that interest rate cuts have begun to come into view, and policymakers are considering and discussing when it would be appropriate to cut rates. Looking ahead, the inevitability of interest rate cuts has become a theme. The Dow Jones Industrial Average hit a historical high overnight, and the Asia-Pacific stock markets also opened higher.
Will 2024 be better?
Looking forward to the Hong Kong stock market in 2024, Chen Da anticipates a mean reversion for the Hang Seng Index, "In mainstream capital markets, the only other instance of a four-year losing streak was the Dow Jones Industrial Average during the financial crisis of 1929. Therefore, the probability of a five-year losing streak is small."
Ping An Securities' research report indicates that, historically, when the Federal Reserve's policy shifts from tightening to easing, equity assets generally rise. In the six-month period following the end of the last four "interest rate hikes," the average increase of the Hang Seng Index was 12.2%; whereas in the six-month period following the start of "interest rate cuts," the average performance of the Hang Seng Index was a decline of 4.70%. The Hang Seng Tech Index, in the most recent six-month period following the end of "interest rate hikes," saw an average increase of 17.7%; and in the six-month period following the start of "interest rate cuts," the average increase was 25.10%. However, it should be noted that the Hang Seng Tech Index only has data from 2018, while the Hang Seng Index has an average from four instances since 1995.
Regarding the industry outlook for the Hong Kong stock market in 2024, Ping An Securities is optimistic about technology innovation stocks, especially artificial intelligence and smart automotive; followed by the recovery of industries such as education, apparel, and catering; and thirdly, the high dividend sector, where Hong Kong dividends have a certain cost-performance ratio compared to A-shares, and there is a long-term capital allocation demand for them. The average dividend rates for the coal and transportation industries in the past 12 months are 13% and 10%, respectively, which are 1.9 times and 3.8 times the average dividend rate of the entire A-share market.
"As the Hong Kong stock market, which was originally dominated by foreign capital, adjusts to a market participated in by domestic and non-European and American capital, there will inevitably be some pain in the process. As long as the listed companies continue to develop, their value will eventually be reflected. Capital is also profit-driven; if the Hong Kong stock market can show a good profit effect, I believe that foreign capital will not stick to its 'refusal' stance in the future," said Chen Da.