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Hang Seng soars as China sentiment shifts

market snapshot

3 May 2024 |
Active ESGMacro
Hong Kong’s benchmark index has been on a bull run as investors warm to cut-price opportunities in China.

Fast reading

  • The Hang Seng Index has seen a reversal of fortunes after a slide of more than 41% since early 2021 following the introduction of Hong Kong’s controversial national security law.
  • The US Federal Reserve, meanwhile, held rates at its policy meeting this week and officials dismissed hopes that cuts will happen any time soon.
  • Spanish bank BBVA has proposed a merger deal with fellow Spanish lender Banco Sabadell, in a sign that M&A activity is picking up across the banking industry.

Hong Kong’s benchmark Hang Seng Index has risen more than 12% over the last 10 days1, and was the best-performing major global index in April, as sentiment began to shift on Chinese equities and foreign investors warmed to lower-valued Hong Kong-listed shares.

The Hong Kong rally follows a torrid period that saw the Hang Seng Index slide more than 41%2 since February 2021 following introduction of a controversial national security law.

“The Hang Seng Index saw a reversal of fortunes to finish April with a bull run. Earnings in Hong Kong have helped drive the rally as they show more resilience in the Chinese economy than many expected,” says Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes Limited.

The Chinese economy could be at the beginning of a turn around

Chinese PMI3 figures added support to the rally as the readout showed a second straight month of growth. “These factors are daring to suggest that the Chinese economy could be at the beginning of a turn around, and certainly supports the thesis that there are many stocks in China and Hong Kong that are undervalued,” adds Grant.

Hong Kong stocks have also benefited from investors moving funds away from other Asia-Pacific markets such as Japan or India, where currencies have been under pressure from the stronger US dollar. The Hong Kong dollar is pegged to the US dollar by a linked exchange-rate system.

Figure 1: Hang Seng Index on a tear

Higher for longer

The US Federal Reserve, meanwhile, has signalled that borrowing costs are likely to remain higher for longer as it grapples with stubbornly high inflation. At its policy meeting this week, the Federal Open Markets Committee unanimously decided to keep the Fed funds target rate at 5.25-5.50%. In the press conference, Fed Chair Jerome Powell dismissed hopes that cuts will happen any time soon.

“The Federal Reserve has clearly had its confidence shaken by the recent string of disappointing inflation releases. While the bar for moving back to a tightening bias is quite high, it seems likely that the current Fed funds target range will be unchanged for the next several months,” says Susan Hill, Senior Portfolio Manager and Head of the Government Liquidity Group at Federated Hermes.

“Notwithstanding the Federal Reserve’s loss of conviction about prices, it opted to move forward as expected with reducing the amount of run-off from the balance sheet by lowering the cap on US Treasuries from US$60bn to US$25bn per month, while keeping the mortgage-backed securities cap at US$35bn,” Hill adds.

The prospect of higher-for-longer rates has dampened investor appetite for US equities. The blue-chip S&P 500 Index fell 4% in April, while the tech-heavy Nasdaq Composite lost 4.5% over the month4

Bank M&A momentum

Elsewhere, Spanish bank BBVA has proposed a merger deal with fellow Spanish lender Banco Sabadell, which if successful would create one of the biggest banks in the eurozone.

BBVA’s market capitalisation is just under €60bn, and the bid values Banco Sabadell at more than €12bn5.

“As we approach potential rate cuts by the European Central Bank and the Bank of England, consolidation across the industry gathering momentum,” says Filippo Maria Alloatti, Head of Financials – Credit at Federated Hermes Limited. “We have already seen two banking deals announced in the UK. It will be interesting to see the official answer from Banco Sabadell.”

For further insights on US equities please see: 15 for 15: A US SMID retrospective

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