Kay Li

Investing.com: It’s not an exaggeration to state that the 2021 Hong Kong Stock Market was a loss year, particularly for technology and internet sectors, where the down 14.1%, and down 34.8% respectively, were among the most volatile global indices.

The trend in Hong Kong stock prices over the last year has seen a lot pressure.

The market’s incremental capital has suffered from a lack of foreign capital flows. The global stock market rose after the collapse of the Pandemic. This was because the central banks around the globe stopped printing money.

Hong Kong stock market does not have the same access to capital as U.S. and European stock markets. However, Hong Kong stock exchanges do have the option of monetary policy or quantitative easing.

Hong Kong’s foreign capital inflow is lukewarm, but it does not mean that the market depends heavily on this inflow. At the beginning of 2019, there was a significant amount of outbound capital from China that supported the market. However, notable outflows were seen in June, July and August. In July, the total outflow of capital to Hong Kong from China reached HK$63.5 trillion, which was the largest single-month outflow since the creation of the interoperability mechanisms.

However, foreign capital didn’t stop flowing. Outflows exceeded HK$20.2 Billion in a single month of July. Bloomberg data revealed that the Hong Kong stock markets continued to see foreign capital flow, with a net loss of HK$35 billion and a slight outflow to China. These figures primarily reflect selling Hong Kong stocks of Internet giants.

However, China’s new education policies, antitrust mechanisms, and national data security all put pressure on markets. The State Administration of Market Supervision (SAMS), for example, published a statement on 12 March 2021 against Chinese Internet-technology companies. Tencent Holdings Ltd. ADR (OTC) (HK):). Baidu Inc (HK:) (NASDAQ:), Meituan (HK:), Suning Commerce Group Co Ltd (SZ:), Alibaba Group Holding Ltd. (HK) (NYSE:), JD Com. (HK) (NASDAQ:), Bytedance and Didi Global. They were convicted of monopolistic acts, imposing severe penalties on those related to them.

Shortly thereafter, in July 2021, the “Opinions on Further Reducing the Burden of Assignment and Off-Campus Training for Students in Compulsory Education” (the “Double Reduction” policy) was published, followed by a sharp drop in education stocks on the Hong Kong stock market: New Oriental Education & Technology (NYSE:) fell 54.2%, TAL Education Group (NYSE:) fell 70.8%, and Gaotu Techedu Inc DRC (NYSE:) fell 63.3%, and several other online education and training businesses plunged in response. It led to the Hang Seng Technology Index falling to an unprecedented low.

Another factor that contributed to the decline of Hong Kong stocks is the plummet of financial and property stocks on the Hong Kong stock exchange.

If the value of Hong Kong stock market bottoms out in 2022, will there be a rebound or even more pressure on it?

The pressure on the Hong Kong stock exchange will not be eased next year, it is certain. The market will be affected by China’s new education policies, national data security, and antitrust regulations. However, global trade relations remain a risky area.

A recent Federal Reserve tightening in its stance has resulted in a decline of the incremental capital flow into Hong Kong stocks. At the December FOMC meeting, Fed Chairman Jerome Powell retired the term “transitory inflation”, acknowledging that inflation may be more persistent. Markets expect the Fed to accelerate the pace of its tapering of bonds purchases to address inflationary pressures. Current interest rate futures show a 59.1% chance of a rate hike in May next year, and the Fed’s dot plot shows three rate hikes in 2022.

How will it affect Hong Kong stocks? The Fed’s tightening of monetary policy will likely result in overseas funds returning to the U.S. stock exchange and U.S. dollars assets. Investors will also choose to decrease their exposure to risky assets. This will reduce future inflows into Hong Kong stocks.

Noting that US and Hong Kong stocks have been in a weaker relationship since interoperability began in 2014, as the impact of capital surging on Hong Kong stocks slowly increased, is important. Under the impact of the pandemic in February 2020, Hong Kong stock prices and U.S. stock markets showed complete divergence. The U.S. shares plummeted and rebounded, while Hong Kong stocks remained low. The disruption of the pandemic also impacted Hong Kong stock markets to some extent. There was little willingness to transfer capital from overseas to Hong Kong stocks.

Second, market analysts predict that the Hong Kong Stock Exchange will host a Chinese stock listing in the coming year. This could lead to a siphoning effect, and increase liquidity.

We do note, however, that the Hong Kong stock exchange is currently significantly undervalued in 2022 according to many investment banks institutions. The oversold Hong Kong stocks are likely to recover.

Investing.com – A look at it technical chart, we see the Hang Seng’s RSI, BOLL and MACD indeed show signs of bottoming. After months of volatility, Hong Kong stocks’ downward momentum has started to slow. Zhang Yidong is the Global Chief Strategist of Singyes Securities and the General Manager of Overseas Research Center. He believes Hong Kong stocks are at support and that a technical bull markets will emerge in the next year. This market could see gains up to 15% from 2021 through 2022.

The Hang Seng Index, on the other side, is at the SMA of 168 months. Breaking below it could mean a new bottom.

Regulation and valuation are two other positives. Everbright Securities feels that Hong Kong stocks are now valued at a historical low. From a price to books valuation, the Hang Seng Index (and the Hang Seng Composite Index) have approximately two standard deviations above the average. This is a historic low.

According to the policy standpoint, most investors believe that China has stabilized its policy regulations, which provides a strong foundation for Hong Kong’s stock market. CICC’s view is that China will adjust its policy in favor of ease, which would lead to a positive Hong Kong stock market. With this background, Hong Kong stocks can outperform other overseas Chinese stocks due to their low valuations and lack of liquidity.

Which are the top sectors in Hong Kong Stocks for 2022?

CICC reports that the public funds held their largest absolute positions at the close of the third quarter. These included media and entertainment as well as pharmaceuticals and biologics. General finance, tech hardware and equipment, and the retail sector in Hong Kong’s stock exchange were the top three. According to CICC, investors should concentrate on long-term stability and not just short-term growth. This includes some midstream, downstream, and real estate sectors, and the downstream consumer sector. These are all subject to upstream price cuts and support.

Guoxin Hong Kong noted that Internet investment has fallen in recent years. Growth themes, such as zero carbon environmental beneficiaries and the metaverse, have been a focus of growth. Electric vehicles are equivalant to the 2009 smartphone year. It is an excellent time to make investments in domestic and international electric vehicle manufacturers and other industry players.

UBS believes Hong Kong’s retail and local banks stocks are undervalued. According to UBS, major central banks of developed economies could begin cutting bond purchases at a time when inflation is rising. This would boost real interest rates. Furthermore, the Hong Kong performance of local bank stocks can be positively correlated and related with real interest rate performance. Hong Kong has a dynamic price-to earnings ratio of approximately 1.1x, as well as a dividend yield in excess of 5%. About 5% is the dividend yield of Hong Kong bank stocks. However, there are some policy benefits that could help Hong Kong’s local retail stock.