China’s slowdown is not just affecting the mainland – its shift in economic gears has also put a brake on the velocity of the Hong Kong stock market

November 20, 2013 Leave a comment

November 19, 2013 6:45 pm

Hong Kong’s gears grind slowly

By Paul J Davies in Hong Kong

China’s slowdown is not just affecting the mainland – its shift in economic gears has also put a brake on the velocity of the Hong Kong stock market. This velocity measure – the turnover of the market divided by its total value – is close to its weakest level in a decade, according to Morgan Stanley. For the exchange itself, this is bad news – holding back its earnings both last year and this to a level below that recorded in 2011.So, will the market-focused reforms in China and the cleaning up of its own stock market help out the Hong Kong Exchange? Morgan Stanley analysts think there is a good chance that the answer will be yes.

They reckon that better sentiment towards China will drive daily turnover from a lowly HK$63bn ($8.1bn) on average in 2013 to almost HK$80bn by 2015. That is significantly better than 2012’s sputtering HK$54bn average, and 2011’s slightly more robust HK$68bn. If things go really well and there is a jump in fresh listings of Chinese companies, then turnover could rise as high as HK$100bn a day on average, they say.

But is this likely? There are reasons why Hong Kong may not change gear – even if China does. These come down mainly to the character of its Chinese stocks.

More than 60 per cent of the so-called H shares in the China Enterprises Index are made up of financial stocks. And there are signs that investors in the Hong Kong market have had more than enough of these. Two of the IPOs that have been sold in Hong Kong recently are banks, but neither is trading fantastically well.

Another 28.5 per cent of the index is old-fashioned heavy stuff – oil and gas, basic materials and industrials – none of which are meant to benefit from China’s reforms. Consumer stocks and healthcare make up just 6.5 per cent of the index. Hong Kong will need a lot more of these if it is to accelerate.

Filed under Macro Trends

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