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HK Stocks Soar Past 19,000; India, Japan See Slowing Inflows
On May 13th, the Hang Seng Index in Hong Kong broke through the 19,000-point mark, closing at 19,115.06, with a gain of 0.8%. In contrast, the three major A-share indices closed lower, with the Shanghai Composite Index down by 0.21% and the Shenzhen Component Index down by 0.6%. Over the past week, the rebound of the Hong Kong stock market has also far exceeded that of A-shares.
"This indicates a very strong willingness to increase allocation to Hong Kong stocks or to reduce the underweighting of Hong Kong stocks," said a strategy analyst from a U.S.-based international investment bank during a client call, "Many hedge funds have already increased their allocation to Hong Kong stocks, and some long-term European funds, even if they have not yet taken action, have clearly shown a recent increase in their willingness to understand the Chinese market."
The Hong Kong stock market has been on an upward trend since the end of January this year, rebounding from its low point with an increase of over 25%, entering a technical bull market, mainly driven by favorable policies that have improved the investment atmosphere. Recently, there have been reports that Chinese policymakers are considering a proposal to exempt personal investors from the dividend tax on Hong Kong stocks purchased through the Shanghai-Shenzhen-Hong Kong Stock Connect, which institutions believe is a series of measures introduced to support the market's rise.
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Foreign capital increases allocation to the Chinese market
Goldman Sachs research shows that in the Asian market, the flow of funds into the previously most popular stock markets of Japan and India has recently eased, while investors have significantly increased their allocation to the Chinese market.
From the beginning of the year to date, foreign capital flow data shows that the Japanese stock market has seen a net inflow of $31 billion, southbound funds (mainland capital entering Hong Kong stocks) have seen a net inflow of $29 billion, the South Korean stock market has seen a net inflow of $15 billion, northbound funds (foreign capital entering A-shares) have seen a net inflow of $11 billion, and the Indian stock market has seen a slight net outflow, while the ASEAN market has seen a net outflow of $2 billion. It is not difficult to see that onshore and offshore Chinese markets have become the markets that have attracted the most capital this year, with low valuations and expectations of recovery being the main reasons.
Looking at the situation last week, the emerging Asia region attracted $1.3 billion in capital inflows last week, led by China Taiwan, South Korea (+$900 million), and A-shares (+$700 million). India (-$1.1 billion) and ASEAN (-$100 million) saw capital outflows. So far this year, the emerging Asia region (excluding China) has attracted $13 billion in foreign capital inflows. Since the peak in January 2021, the emerging Asia region (excluding China) has seen $114 billion in foreign capital outflows (related to the U.S. interest rate hike cycle causing capital outflows), and $56 billion (about 49%) has flowed back, indicating that there is still room for capital inflows. "If capital flows back to emerging markets, China will also benefit, and it is not necessary for capital to flow out of other Asian or emerging markets to flow into China."
"The Nikkei index, which has been advancing strongly, appears to be tottering, with the weakening yen, corporate reforms, and fervent risk appetite, all the favorable factors can be said to be fully priced in. After climbing to historical highs, traders are wondering what will be the catalyst for the next round of increases," said David Scutt, a senior analyst at Gain Capital Group, to reporters. In contrast, the Hang Seng Index, which is not popular and underinvested, entered a bull market after falling to a multi-year low earlier this year.
"Due to the lack of obvious correlation with Western stock markets, its sensitivity to foreign macro events is also far less than that of Western stock markets. Currently, Hong Kong stocks have an interesting trading prospect, which can be traded directly or in pairs," he said.
Hong Kong stocks still have upward momentum.Due to the generally weaker liquidity of Hong Kong stocks compared to A-shares, and the lower valuations of Hong Kong stocks (the Hang Seng Index once fell to the 1997 level, nearly 15,000 points), the rebound of Hong Kong stocks since April has also been more intense.
The news of exempting personal investors from paying dividends tax on Hong Kong stocks purchased through the Shanghai-Shenzhen-Hong Kong Stock Connect has become a catalyst for the market in recent times. Although the news has not been officially confirmed, in the near term, the mainland regulatory authorities have introduced a series of policies to promote interconnectivity and support the enhancement of liquidity in the Hong Kong market. For example, within a week after the launch of the new "Nine National Policies" in April, the China Securities Regulatory Commission announced five measures to support the development of Hong Kong's capital market, covering further expansion and improvement of the existing Shanghai-Hong Kong Stock Connect program (including ETFs, REITs, and mutual funds), encouraging more funds to flow into Chinese companies that go public in Hong Kong.
"Currently, the dividend tax rate for individual investors trading through the Southbound Trading is 20%, and if it is abolished, it may further promote the flow of funds to the Southbound Trading," said the investment bank strategist. It is worth mentioning that since April, the funds from the mainland to Hong Kong have been in a net inflow trend every trading day, a momentum that has never been seen since the launch of the interconnectivity mechanism.
In addition to domestic capital, foreign interest is also increasing. In fact, since the end of February, hedge funds have poured in significantly, but long-term funds are still on the sidelines. However, the aforementioned strategist told the reporter, "Recently, based on communication with some long-term investment institutions in Europe and Singapore, it is noticeable that the interest in the Chinese market is increasing. The official policy focus has also clearly shifted to studying the resolution of existing inventory, which is actually a concern for foreign capital."
Traders believe that from a technical perspective, Hong Kong stocks currently have momentum. "Since the Hang Seng futures broke through the 200-day moving average and the long-term downtrend resistance line at the beginning of 2021, they have been in a 'breakout mode,' rising more than 27% from the low point touched in January. Although the index futures experienced a slight pullback after standing above the resistance level of 18,400, the price trend later in the week was a definite bullish engulfing pattern, and another bullish signal appeared last Friday." Scott told the reporter, as the Hang Seng Index has now broken through the resistance level of 19,000, the level of 19,600 above is worth paying attention to, which was a point of tug-of-war between bulls and bears in the middle of last year. The next levels to watch are 20,260 and 20,800.
Focus on high dividend and internet sectors
After this wave of rebound in Hong Kong stocks, the choice of sectors has also become a focus of market attention. Currently, the high dividend sector and the upcoming report of internet giants are the most eye-catching.
Goldman Sachs' recent report shows that if the Hong Kong Stock Connect dividend tax is expected to be reduced, funds may further flow into high dividend and high shareholder return stocks. Among these sectors with a dividend payout of more than 5%, the Southbound Trading's holdings account for 60%.
In addition, March and August are the peak periods for companies to announce dividends, while May to September are the peak periods for ex-dividend dates, so from a timeline perspective, summer is also a timeline when dividends receive more attention.
At the same time, the current earnings season is still ongoing, and in the next one or two weeks, the earnings reports of internet giants may become the focus of market attention, with Tencent, Alibaba, and others disclosing data.It is worth mentioning that after the sell-off in April, the sentiment in global stock markets seems to have turned optimistic, which has also boosted the Hong Kong stock market. Since May, U.S. economic data has weakened across the board, with the latest Michigan Consumer Sentiment Index falling to its lowest level since December. This has stimulated a slight rebound in expectations for a Federal Reserve rate cut and helped the three major U.S. stock indices to rise for three consecutive weeks, continuing to challenge their respective historical highs, with the Dow Jones Industrial Average achieving an eight-day winning streak. At the same time, the prospect of interest rate cuts in major European economies has led to new highs in benchmark indices such as the UK, France, and Germany.
One of the key data points that could potentially disrupt the market in the near term is the U.S. CPI data. The market expects the overall CPI to decrease from 3.5% to 3.4%. This data has been fluctuating over the past year and has consistently failed to drop below 3%, highlighting the stickiness of inflation and its potential threat. The core CPI is expected to decrease from 3.8% to 3.6%. "Based on the poor non-farm report from April, this CPI may find it difficult to significantly exceed expectations. Conversely, if inflation falls significantly, gold, U.S. stocks, and Asian stock markets are expected to continue to rebound along with expectations for a rate cut," Scott told the reporter.
Goldman Sachs expects that this inflation will slightly exceed expectations. The trends of three key components are crucial. First, it is expected that automobile insurance prices will rise by 1.6%, with prices continuing to catch up with costs, which has been a "catch-up inflation item" contributing to inflation exceeding expectations in recent times; second, health insurance will remain unchanged starting this month, as the Bureau of Labor Statistics incorporates new data on insurance costs; additionally, it is anticipated that rental inflation will slow to 0.37%, with the gap between new leases and renewals continuing to narrow, but the owner-equivalent rent inflation rate will remain at 0.45%, reflecting stronger rent growth for new tenants in single-family detached units, with a larger gap between new tenant rents and existing tenant rents.
In addition to the U.S. CPI data, the U.S. April retail sales data will be released on Wednesday evening. The retail data for March, which significantly exceeded expectations, once caused a global stock market crash. The U.S. PPI data will be released on Tuesday evening, and Federal Reserve Chairman Powell will also speak on Tuesday evening.
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