Hong Kong’s $530 Billion Stock Rally Is Showing Signs of Strain

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Hong Kong’s $530 Billion Stock Rally Is Showing Signs of Strain(Bloomberg) -- A half trillion dollar rally in Hong Kong stocks is suddenly in danger.The city’s liquidity-driven rebound is starting to unravel amid concern over escalating local violence, as well as signs that optimism over a potential U.S.-China trade deal has been overdone. A planned strike aimed at disrupting Hong Kong’s public transport Monday morning resulted in two demonstrators being shot and injured by police.The Hang Seng Index dropped 1.5% Monday. Warning signs were already showing in the market last week, with the gauge trading in overbought territory, above its 200-day moving average and higher than the key 27,000 point level. The local dollar was little changed at 7.8297 per greenback Monday after its best week since mid-September.“Hong Kong safety is now a big question,” said Jackson Wong, asset management director at Amber Hill Capital. “Some people are worried that today’s event would escalate the protest. There’s also conflicting messages from the U.S. and China over the trade deal. Last week people were pricing in a successful deal.”While President Donald Trump said late last week that trade talks with China were moving along “very nicely,” he added that reports about how much the U.S. was ready to roll back tariffs on China were “incorrect.” Those reports had helped fuel the risk-on rally that sent a gauge of global stocks to its highest level since early 2018.Another concern is that Hong Kong’s bleak economic situation has yet to fully filter through to its stocks. Faced with its worst business outlook since the 2008 financial crisis and a plunge into recession, a chill may be coming for Hong Kong’s corporate earnings. e Qi, a fund manager with Huatai Pinebridge Fund Management Co. who called the rally in mid-August, says he’s preparing to sell.“Hong Kong’s gains are just part of a global risk-on rally amid a flood of liquidity, and the short-term gains are way too strong,” said He. “I might consider lightening positions as the index approaches 28,000 points, and even more so if it rises toward 30,000.”China’s largest brokerage Citic Securities Co. earlier this month trimmed its earnings growth forecast on the Hang Seng gauge to 4% this year from a previous estimate of as much as 8%. The continuing protests in the city and the impact on commercial property, retail and tourism industries has gone beyond expectations, strategists led by Yang Lingxiu wrote in a note dated Nov. 4.Wharf Real Estate Investment Co. Ltd. lost 3.9% as the worst performer on the MSCI Hong Kong Index on Monday. MTR Corp. fell 1.4%, while CK Asset Holdings Ltd. and Henderson Land Development Co. both lost at least 1.2%.To be sure, traders can still find opportunities in a market where many firms rely on the mainland for earnings. China’s A shares are about 27% more expensive than their Hong Kong listed peers, compared with a long-term average of 20%. “There are so many bargains left on the table,” said Sean Darby, a global strategist at Jefferies Hong Kong.Still, the recession will likely make its presence felt in earnings for this year and in the first quarter of 2020, said Ken Chen, a Shanghai-based strategist with KGI Securities Co.“There’s no end in sight to the local unrest and expectations of an economic recovery next year remain low,” he said. “Hong Kong is just rising along with global markets, and the gains will pause when the global rally weakens.”\--With assistance from Cindy Wang and Jeanny Yu.To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.netTo contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, David WatkinsFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

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