Has the Hong Kong stock market bottomed out yet? Is the current low really that low? Could the year-end low reach 22,660 points?

Text | Philip

Following the regulatory crackdown over the past two months, coupled with the looming prospect of Fed rate hikes and the potential resurgence of the Delta variant—both of which could hamper economic recovery—Hong Kong stocks are under significant downward pressure. The Hang Seng Index$Hang Seng Index (800000.HK)$Recently, the index dipped to a year-to-date low of 24,581, marking a 20% decline from its February peak of 31,183 and technically entering a bear market. Since the Federal Reserve launched unlimited quantitative easing in March last year, this has been a pivotal turning point for the sustained global market boom; thereafter, ample liquidity flooded the markets, driving stock prices higher. However, after a year and a half, with the looming prospect of monetary tightening and a wave of regulatory scrutiny, investors are closely watching to see whether the market has now reached another inflection point. Experts who accurately predict that the Hang Seng Index will test 25,000 this year believe that Hong Kong stocks still have further downside potential, with the bottom possibly emerging in the fourth quarter.

Hong Kong stock valuations remain some way from bottom levels; after a technical rebound, they may fall further.

Following the outbreak of the COVID-19 pandemic last year, the prevailing strategy of buying on dips—fueled by the relentless liquidity injections from central banks worldwide—seemed virtually foolproof. In today's bear market, investors' primary concern is when they can "catch the bottom," yet experts believe the time is not yet right. Zhao Wenli, Managing Director and Chief Strategist at the Research Department of CCB International, argues that, given the market's lingering uncertainty about policy visibility, the impact of the Federal Reserve's impending monetary tightening and the potential peak in U.S. equities have yet to be fully priced in. Moreover, Hong Kong stocks currently trade at valuations near the historically ultra-safe lower end—around 9 to 10 times forward earnings—which still leaves some room for further downside. With no major positive catalysts in sight in the near term, he believes Hong Kong stocks have not yet hit bottom; after a technical rebound, they are likely to decline again, with the true bottom perhaps emerging in late third quarter or fourth quarter.

Zhao Wenli has lowered his forecast for the lower bound of the Hong Kong stock index's trading range. Under the base-case scenario, the Hang Seng Index is expected to trade in a range with a lower limit of 22,660 points, reflecting 10% earnings growth and a forward price-to-earnings ratio of 11 times. In fact, his年初 forecast for the broader market—that the Hang Seng Index would bottom out at 25,000 this year—has now proven to be an ironclad reality, suggesting that his outlook may offer some valuable insights.

Regulatory Uncertainty Surrounding Tech Stocks May Persist into the First Half of Next Year, Pressuring Profit Margins

Chinese-funded tech stocks are the source of this round of market decline, among which Alibaba (09988.HK)$BABA-W (09988.HK)$The sector has now fallen below both its IPO price and last year's low, hitting a new all-time low. How long the broader industry-wide revaluation period will last is a question of great concern. According to Zhao Wenli, the duration of this revaluation phase will be largely shaped by the policy environment and could extend into the fourth quarter or the first half of 2022. Although regulatory risks remain elevated in the short term, there is potential for the December Central Economic Work Conference—or the Two Sessions in March 2022—to signal that regulators have achieved preliminary progress and are easing their stance somewhat.

He believes that the revaluation of new-economy sectors will unfold in two phases: most of the current valuation adjustments have already been completed, and over the next six to twelve months, it will be even more important to watch how earnings are recalibrated. This year has seen a sustained intensification of antitrust enforcement against internet platforms, with key measures continuously rolled out since the beginning of the year. Under the policy direction of common prosperity, major internet giants are expected to shoulder greater social responsibilities—for example, their tax incentives may be phased out, and they may be required to provide social security contributions for delivery workers—which could squeeze their profit margins and earnings growth. That said, drawing on the history of antitrust enforcement in the United States, while antitrust actions may deliver a short-term hit to tech giants' stock prices, their long-term impact is likely to be limited. The intrinsic value of the platform economy will ultimately be recognized, and tighter regulation will foster the industry's healthy and orderly development over the long term. As the implications of regulatory policies become clearer, large-cap tech stocks may bottom out by the end of the third quarter or in the fourth quarter, presenting an attractive buying opportunity.

Although tech stocks will eventually bottom out, their business models are already undergoing fundamental transformation, which is reshaping how capital markets interpret them and driving a significant shift in valuations. Zhao Wenli believes that, in the post-pandemic era, as China accelerates the establishment of a new development paradigm centered on the domestic circulation while fostering mutual reinforcement between domestic and international circulations, expanding consumption and upgrading consumer spending will play a pivotal role. Internet platforms are particularly important in driving this consumption upgrade and are expected to maintain solid growth going forward; however, monopoly-driven profits will be hard to sustain, profit margins may come under pressure as regulatory scrutiny tightens, and valuation premiums are likely to narrow.

It's Not Yet Time to Invest in Tech Stocks—Focus on High-Growth Stocks with Clear Policy Support

At present, as the broader market may not yet have bottomed out and the market still needs time to digest the impact of regulatory measures on tech stocks, stock prices may not fully reflect policy risks. Zhao Wenli advises investors to wait until the market has bottomed out and the implications of regulatory policies have become clearer before initiating opportunistic buying at lower levels. Meanwhile, high-growth stocks with policy certainty—such as hardware technology, new-energy vehicles, renewable energy, biopharmaceuticals, and "national trend" consumer goods—remain attractive.

He believes that "the CPC Central Committee has explicitly stated that China will strive to peak carbon emissions before 2030 and achieve carbon neutrality before 2060, and has mandated that these goals be integrated into the overall framework for ecological civilization development. New energy is receiving robust policy support, and with continuous technological advancements in recent years, its costs have become increasingly competitive, making it a high-growth sector. In addition, breakthroughs in hard-tech innovation, biopharmaceuticals, fertility and elderly-care services, as well as small- and mid-cap growth stocks with core competitiveness, will benefit from national policies, offering promising prospects for future growth."

Amid rising interest-rate hike expectations and mounting inflation, investors would do well to strike an appropriate balance between growth and value stocks. During market correction phases, a defensive stance is advisable; investors may consider increasing allocations to undervalued, high-dividend Chinese financials, telecommunications firms, and utilities.

High Inflation Risk May Persist Longer; Regulatory Risks to Continue in the Second Half

At present, two major clouds are looming over the China–Hong Kong market: first, the Federal Reserve's stance on inflation, which has sparked doubts about whether interest rates will be raised ahead of schedule; second, the regulatory crackdown, both of which have left investors uncertain about how to proceed. Zhao Wenli believes that the risk of high inflation may prove more persistent than expected. Judging from the minutes of the Fed's July meeting and the recently concluded Jackson Hole symposium, tapering quantitative easing is likely to begin before the end of this year. However, the Fed also emphasized that an earlier taper does not necessarily mean an earlier rate hike. For now, the Fed maintains that inflation is only temporary, so the futures market still expects the first rate hike in December 2022. Nevertheless, if short-term factors driving inflation continue to exceed expectations even after they have been absorbed, the market will likely revise its rate-hike outlook.

In recent months, the cloud of regulatory risk has steadily expanded from internet platforms to multiple sectors. Since July, a flurry of regulatory measures has been rolled out, ranging from crackdowns on internet platforms and rectification of the education and training industry to efforts to standardize and regulate the real estate market—and more recently, the call for common prosperity. Market participants are now deeply concerned about which sector will be next and how long these pressures will persist. Zhao Wenli does not rule out the possibility that regulatory risks could linger throughout the second half of the year; however, he believes much of the impact has already concentrated in the third quarter and is gradually being absorbed by the market. He analyzes that, given the current policy trajectory, regulatory measures targeting areas closely tied to people's livelihoods—such as education, the internet, and real estate—are likely to remain robust in the second half.

269K Views