August Strategy For Hong Kong's Stock Market: Anticipating An Uplift In Hang Seng Index As Valuation Remains Low

In July 2023, the main theme of the Hong Kong stock market was “rebound”, with the Hang Seng Index rising 6.15 per cent and the Hang Seng Technology Index rising 16.33 per cent, leading major global indices higher. The turnover of the Hong Kong stock market was 2.04 trillion dollars, the same as in June, lower than the peak in March, and the market’s willingness to transact was low.

In July 2023, overseas markets, the US stock market maintained its strong. Nasdaq and S&P 500 index rose five consecutive monthly levels, S&P 500 rose 3.11%, Nasdaq index rose 4.05%, Dow Jones Industrial average rose 3.35%. Britain’s FTSE 100 and France’s CAC40 index closed high, and Germany’s DAX30 index hit a new record high.

In terms of sectors, most of the Hang Seng’s 12 major industries rose, led by information technology, consumer discretionary and raw materials, with gains of 12.99%, 12.88% and 12.43%, respectively. Only conglomerates and utilities saw slight declines.

In terms of Hong Kong stock Connect (southbound funds), Southbound funds bought a net HK $15.8 billion in July 2023, including HK $7.429 billion in Shanghai and HK $8.371 billion in Shenzhen. Began to reverse the trend of net outflows in June 2023.

From the perspective of capital flow, Hong Kong stock connect capital mainly flowed into the health care, real estate construction and energy industries, while public utilities showed a large outflow situation. In August, we can focus on the industries with large net inflows of capital.

Hang Seng Index, in July, the Hong Kong stock market as a whole showed a volatile trend, the bottom is more solid, from the trend point of view, the pattern of range volatility has not broken, the pressure level above 20500 points, the support level below 18500 points. It is expected that the center of gravity of the Hang Seng Index will move up in August, and most of the time will be running above the MA250, but it still failed to effectively break through the above shock range.

In terms of volume, the turnover of the Hong Kong stock market has been low from April to July, and is expected to recover modestly in August with the recovery of Hong Kong stocks.

The influencing factors mainly include the following aspects:

1）In terms of valuation, as of July 31, 2023, the Hang Seng Index’s price earnings ratio is 9.41 times, price-book ratio is 0.96 times, Price Cash Flow Ratio is 3.4 times, and price-sales ratio is 1.17 times, which is significantly lower than the valuation of major global stock indexes.

2）In terms of the performance of index components, in August, a number of Hang Seng Index weighting stocks will release semi-annual reports. In view of the low base last year and the impact of the epidemic basically eliminated and other factors, it is expected that the performance of the semi-annual report will gradually recover. Focus on: Alibaba, Tencent Holdings, HSBC Holdings, AIA and other company earnings.

3）Economic indicators, stay tuned for U.S. inflation and jobs data. The inflation indicator PCE is expected to maintain its downward trend in August, and the labor market (non-farm data) may turn weaker.

4）Fed monetary policy expectations. The market expects that the Fed’s current interest rate hike cycle has ended, or that the US monetary policy is in the transition period of interest rate hike — interest rate cut, even if there is another interest rate hike, the impact is not big. And it is expected that the Fed will start to cut interest rates next year. Judging from the historical data of the past period, the Hong Kong stock market has a high probability of rising in the transition period between the Fed’s interest rate hike and interest rate cut.

Risk tips:

Weighted company earnings miss expectations; Fed keeps raising rates; Economic growth misses expectations.

Eddid Securities and Futures Research Department

Contact number: (00852)38966300

E-mail: research@eddid.com.hk

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