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Source: Chen Li

Since the beginning of this year, the Hang Seng Index has risen by more than 4%, the Hang Seng TECH Index has risen by less than 2%, the S&P 500 Index has risen by more than 8% this year, and the NASDAQ Composite Index has risen by more than 16%.

Against the backdrop of China's opening up, why is Hong Kong's stock market underperforming compared to the US stock market?

Positive Expectations for China's Economic Growth

Positive diplomatic signals are frequent, and funds from the Middle East and Latin America are increasingly interested in China. The "two unswerving" policies are supported.

Overall, there are good conditions for corporate profit growth, so it is not the main reason for the weak performance of Hong Kong stocks.

Observing the Bloomberg Hang Seng Index consensus expected EPS, it has been raised to a new high this year, but the Hang Seng Index has not followed its strong rebound.

The pressure on Hong Kong stocks is largely due to the interference of the Hong Kong dollar itself.

Weakness of Hong Kong Stocks Originates from the Hong Kong Dollar

The main reason for the current weak performance of Hong Kong stocks is the Hong Kong dollar itself, not concerns about the economic fundamentals and corporate profits.

Previously, due to the continuous rate hikes by the Federal Reserve, the spread between the Hong Kong dollar Hibor and the US dollar Libor continued to widen, creating arbitrage opportunities, and the market continued to exchange Hong Kong dollars for US dollars.

The proportion of US dollar deposits in Hong Kong banks has significantly increased.

Currently, the weakness of the Hong Kong dollar against the US dollar has triggered a weak exchange range, and the Hong Kong Monetary Authority has intervened to buy Hong Kong dollars, and the surplus of the Hong Kong banking system has been declining, leading to a tightening of Hong Kong dollar liquidity.

However, observing the 6-month fixed deposit of Hong Kong banks in April this year, there is still a significant interest rate spread between the US dollar and the Hong Kong dollar, and there is still room for arbitrage.

When Will Hong Kong Stocks Be Able to Stand Firm?

We believe that we need to see the last rate hike by the Federal Reserve, and the Hong Kong dollar will get rid of the weak exchange range before Hong Kong stocks can rebound strongly.

If the Federal Reserve stops raising interest rates and the US economy officially enters a recession cycle in May this year, the US stock market will gradually price in the expectation of economic decline, and corporate profit forecasts will gradually be lowered, and then the US stock market will show a downward trend, and funds will gradually leave the US.

If the Federal Reserve stops raising interest rates, it will ease the current pressure on the interest rate spread between the Hong Kong dollar and the US dollar, and the Hong Kong dollar will no longer be suppressed in the weak exchange range, which will be conducive to the rebound of Hong Kong stocks.

Even if the Federal Reserve does not immediately cut interest rates, and the interest rate level does not decrease in the second half of the year, as long as the interest rate spread between the Hong Kong dollar and the US dollar no longer widens, the Hong Kong dollar gets out of the weak exchange range, and capital liquidity improves, it will be beneficial to Hong Kong stocks. If China's economic growth rate rebounds in May, and the signal of the Fed's cessation of interest rate hikes in May is clear, foreign long-term funds are likely to flow into China in May-June, which is good news for Hong Kong stocks.

If the expected long-term funds flow in, the market may switch to the pan-consumption sector, as well as China's strong manufacturing sector.