Investment sentiment from survey of Hong Kong SMEs crumbled in most sectors

Although index reading is still positive.

Amid observations that small and medium-sized enterprises (SMEs) in Hong Kong expect better conditions in Q3-2014 after a soft start to the year, it has been noted that investment sentiment has weakened in most sectors, although the headline number remains above 50.

According to a research note from Standard Chartered, the Standard Chartered Hong Kong SME Leading Business Index (SME Index), jointly released by Standard Chartered and the Hong Kong Productivity Council, rebounds to 51.3 in Q3-2014 from 50.8 in Q2-2014.

Three (hiring, sales and profit margin) of the four other main sub-indices also rise in Q3, mirroring recent indications of a stabilisation in macro data both locally and in China.

The only main setback is the investment sub-component, which dips to 53.1 from a strong 56.6.

This suggests a more cautious but still positive bias towards future business expansion, said the report.

Here’s more from Standard Chartered:

The SME Index is created, and the survey is conducted, by the Hong Kong Productivity Council and is sponsored by Standard Chartered Bank (Hong Kong) Limited.

It is forward-looking in that it measures company sentiment for the coming quarter. The most recent survey was conducted in June 2014, and managers of 819 SMEs across eight industries were interviewed.

The survey contains 12 standard questions to capture the changes SME managers expect in various aspects of their business in the coming quarter.

The Leading Index is a composite index based on the diffusion indices for five of the surveyed areas: (1) number of staff, (2) investment, (3) sales, (4) profit margin, and (5) the global economic outlook.

An index reading above 50.0 means that the respondents are generally optimistic about the business environment in the coming quarter, while a reading below 50.0 indicates predominantly pessimistic sentiment.

Sub-components that are more indicative of the longer-term outlook were mixed at best – hiring is a tad higher than in Q2, while investment expectations fall to 53.1 from 56.6.

That said, both measures remain comfortably above 50, meaning that respondents still plan to continue expanding their businesses despite short-term headwinds.

On the other hand, coincident sub-indices – namely sales and profit margin – rise 2.0pt and 2.3pt, respectively.

This matches the stabilisation in China data in June – led by better exports and credit growth, which are bound to start spilling over to Hong Kong.

Unfortunately, not every economic sector is getting a boost (as yet), judging by the decline in the three main industry sub-indices, only to be offset by improvements in other smaller segments of the economy.