Is it time to go long on Hong Kong stocks with interest rate cuts and record buybacks?
As is well known, despite the support of southbound capital, the liquidity of Hong Kong stocks has remained relatively sluggish in the past two years, which has to some extent led to phenomena such as a wave of privatization and a sharp decline in IPO scale.
To boost investor confidence, Hong Kong-listed companies have rolled out record-breaking buyback incentives. The latest news shows that the Hong Kong stock market has also welcomed the heavyweight benefit of interest rate cuts.
Against the backdrop of record buybacks and interest rate cuts, which sectors in the Hong Kong stock market are more worthy of attention?
Buybacks continue to break records, and interest rate cuts add to the benefits
Wind data shows that as of September 18, a total of 237 Hong Kong-listed companies have conducted share buybacks this year, with the total buyback amount exceeding HKD 200 billion, reaching HKD 203.587 billion, far surpassing the full-year buyback amount of HKD 126.901 billion in 2023.
Industry insiders say the record buybacks demonstrate the confidence of related companies in their intrinsic value, which has a positive impact on the Hong Kong stock market as a whole and helps boost investor confidence.
From a company perspective, four companies have repurchased over HKD 10 billion this year, namely$TENCENT(00700.HK), $HSBC HOLDINGS(00005.HK) , $MEITUAN(03690.HK) , $AIA(01299.HK) , with buyback amounts of HKD 83.404 billion, HKD 30.709 billion, HKD 27.449 billion, and HKD 23.949 billion, respectively.
In addition, nine other companies have repurchased over HKD 1 billion this year, including Kuaishou-W, Xiaomi Group-W, Hang Seng Bank, and WuXi Biologics.
Overall, the top buyback companies this year mainly include leading internet companies with operations in mainland China, foreign-invested international leaders, and local Hong Kong leaders.
Additionally, the stock performance of these buyback companies has shown significant divergence this year. Among them, tech-oriented companies like Tencent Holdings, Meituan-W, and Xiaomi Group-W have performed well, while high-dividend stocks like CNOOC and Sinopec have also risen. However, companies like WuXi Biologics, CSPC Pharmaceutical Group, Chinasoft International, and Kingdee International have seen sharp declines this year, with some even halving in value.
It is worth mentioning that compared to buyback benefits, interest rate cuts may be even more "thirst-quenching."
On September 18 (local time), the U.S. Federal Reserve announced a 50 basis point cut in the federal funds rate target range to between 4.75% and 5.00%. This is the Fed's first rate cut since March 2020, marking a shift from a monetary policy tightening cycle to an easing cycle, which has significant implications for global capital markets.
The Hong Kong Monetary Authority followed suit on September 19 (Beijing time), announcing that the base rate would be set at 5.25% according to a preset formula, effective immediately.
On September 19, the Hong Kong stock market rose as expected, with the Hang Seng Index up 2.28% so far and the Hang Seng Tech Index surging 3.75%.
Hong Kong stocks are expected to continue warming up. Which industries are worth watching?
It is worth noting that according to research by Haitong Securities, the Fed has conducted four relief rate cuts and five preventive rate cuts since 1982. Analysis shows that Fed rate cuts significantly affect the trends of equity, fixed-income, and foreign exchange assets, but the patterns for commodity price movements are less clear.
Among them, equity assets have a higher win rate during preventive rate cuts but are more likely to fall during relief rate cuts. Specifically, in domestic stock markets, the performance of A-shares and Hong Kong stocks during rate cuts is similar to that of U.S. stocks, but A-shares show some independence. Developed markets outperform emerging markets, but emerging markets may show greater elasticity during preventive rate cuts.
TF Securities released a report stating that Chinese assets remain attractive in a global market comparison. With expectations gradually improving and hopes for subsequent fundamental improvements, Hong Kong-listed Chinese stocks still offer valuation appeal and a high risk-reward ratio.
Galaxy Securities pointed out in its latest report that the tech sector presents investment opportunities during a rate-cut cycle, for reasons including: 1) After rate cuts, global liquidity tends to improve, with foreign capital flowing into the Hong Kong stock market, benefiting the tech sector. At the same time, southbound capital investment willingness is strengthening, and industrial capital may also support the tech sector's funding. 2) Compared to the overall market, the tech sector, represented by the Hang Seng Tech Index, shows significantly better performance and has substantial room for valuation growth. 3) Internet leaders may benefit from profit growth and low valuation advantages, with buybacks and dividends increasing. Benefiting from industrial cycle recovery and AI smartphone market growth expectations, consumer electronics may see an upward trend.
Additionally, Galaxy Securities said the high-dividend strategy in Hong Kong stocks still holds value.
Recently, Zhang Haoen, Head of Investment for Personal and Business Banking at CMB International, also stated that the focus of the Hong Kong stock market is on dividend stocks, including mainland banks, insurers, Chinese telecoms, and energy. Among tech stocks, some large-cap heavyweights, such as mobile gaming and consumer platform stocks, do not pay dividends. However, as Europe and the U.S. cut rates, capital will flow to Asia, including Japan, Taiwan (China), and South Korea. As long as capital remains in Asia, there is a chance to notice or even flow into undervalued Hong Kong stocks, with large-cap tech stocks likely to benefit.
It should be noted that the Hong Kong stock market hosts many unprofitable biotech companies, and the biopharmaceutical industry's financing environment has been poor in recent years. The liquidity boost from Fed rate cuts may help alleviate the financing difficulties of the biotech industry.
Moreover, if the Hong Kong stock market warms up overall during the rate-cut cycle, the "water seller" Hong Kong Exchanges and Clearing (00388.HK) has relatively high certainty and is worth close attention.
In fact, on September 19, Hong Kong Exchanges and Clearing surged 6.66%, showing significant movement.
Author: Ming Xi
The copyright of this article belongs to the original author/organization.
The views expressed herein are solely those of the author and do not reflect the stance of the platform. The content is intended for investment reference purposes only and shall not be considered as investment advice. Please contact us if you have any questions or suggestions regarding the content services provided by the platform.
