Hong Kong's SMEs still haunted by pessimistic business outlook

Despite sales outlook's slight improvement.

The Standard Chartered Hong Kong SME Leading Business Index (SME Index), released jointly by Standard Chartered Bank and the Hong Kong Productivity Council, improves to 49.6 for Q3-2015 from 49.0 in Q2.

According to a research note from Standard Chartered, this indicates a modest improvement in sentiment among small and medium-sized enterprises (SMEs) in Hong Kong in Q3, although remaining in pessimistic territory.

Of the index components more indicative of the longer-term business outlook, the ‘hiring’ sub-index corrects from its record high in Q2, but remains comfortably above the neutral 50 mark, while ‘investment expectations’ rebound following a disappointing Q2.

Here's more from Standard Chartered:

More ‘coincident’ components like ‘profit margins’ and the ‘global economic outlook’ are stable, while the ‘sales’ sub-index rebounds to 49.2 from 47.3. We believe this reflects underlying resilience, despite the persistent headwinds of the China slowdown and the Greek crisis.

The improvement in the headline SME index would have been more pronounced if not for the 13.6% q/q fall in the ‘retail’ sub-index. Q3 has always been a weak quarter for retailers, but the retail sub-index at a three-year low is a concern, as it reflects the ongoing negative impact of slowing mainland China tourist arrivals and the structural shift in their spending from high-value to lower-value goods.

The survey coinciding with the recent bout of mainland (and Hong Kong) stock market volatility may also have increased the pessimism. We expect more positive retail sentiment in Q4.

Further, the modest deterioration in the ‘import/export/wholesale’ sub-index has been offset by the better ‘manufacturing’ reading. The ‘financial and insurance’, ‘professional and business services’ and ‘real estate’ sub-indices are the clear outperformers. Cost pressure stemming from high wages and rents seems to have lessened.