Why you shouldn't worry about Hong Kong's stock market

It's bouncing back despite raised rates.

According to a report by research firm Jefferies, conventional wisdom would have expected HK equities to have ‘rolled over’ as the Fed raised rates in December, yet the stock market has ‘bounced back’ from the December low despite the US two year note remaining around 1.2%.

Equally, the surprise rise in stamp duty for residents and non-residents on second homes has yet to cause house prices to soften. It would appear that there
have been some counter-balancing forces.

"Perhaps the most important offsetting factor is that HK deposits have continued to grow keeping the loan-to-deposit ratio flat (67.10)," it added.

Here's more from Jefferies:

The financial system appears to have more than adequate cash and hence the HK$ remains on the strong side. Another way to look at this is through the HK monetary base (the total of the aggregate balance and outstanding exchange fund bills and notes) which grew through 4Q16.

While there would normally be concerns about the HK$ if the RMB were depreciating, this has been mitigated by China running a higher inflation rate. True, HK$’s currency continues to appreciate on a broad REER base but China is running with inflation and not deflation as it was in August 2015 when it attempted a crude ‘mini devaluation’. This has ‘softened’ the blow from China’s stealth devaluation for the HK peg.

The stock market is not expensive and a range of companies trade below book value. True, there are few catalysts to improve earnings with China tourist numbers weak and retail sales still falling in both value (-5.5% y-y) and volume (-5.6% y-y) terms in Nov.

Aside from the banks, it would appear that the local property market has become ‘regulated’ much like the domestic utility sector. The September 2016 HKMA half-yearly financial report pointed out that the profitability of retail banks improved in the first half of 2016, mainly attributable to lower operating costs.

Their pre-tax operating profit increased by 14.9% in the first half of 2016 as compared with the second half of 2015, contributing a rebound of the return on assets to 1.07% from 0.95%. No problems there!