Most likely, April's surge is over. What should we do with the struggling Hong Kong stock market in May?

From 2010 to 2022, the performance of Hong Kong stocks in May has seen 3 increases and 9 decreases. In comparison, A shares had 5 increases and 7 decreases in May during the same period.

In April of this year, A shares remained stable while Hong Kong stocks fell nearly 3%. So, will the sluggish trend of Hong Kong stocks in May continue? Will the proverb "May is poor and June is rich" come true? Of course, we cannot rely solely on proverbs to judge, we also need to start from logic.

In the past 12 years, A shares have outperformed Hong Kong stocks in April, especially during the interest rate hike cycle and in 2018 and 2022. This is mainly because A shares are less affected by interest rate hikes than Hong Kong stocks, so A shares often outperform Hong Kong stocks during interest rate hike cycles.

In recent days, the big picture of A shares after Labor Day from 2015 to 2022 has been widely discussed. So, will this trend be similar to previous years?

In April, Hong Kong stocks, which are closely related to A shares, began to lose direction in early March, mainly due to the impact of two factors:

TENCENT's plan to reduce its stake in South Africa continues to hinder stock price increases. In addition, TENCENT reduced its stake in Meituan through dividend distribution, and South Africa's major shareholder received 4% of Meituan's shares as dividends. Based on the experience of JD.com's dividend distribution reduction, South Africa's major shareholder may reduce the shares obtained from distribution within six months. This potential expectation has put pressure on Meituan's stock price. In addition, SoftBank's reduction of Alibaba has also brought resistance to stock price increases.

When the three leading technology stocks in Hong Kong are all suppressed by major shareholders, the Hang Seng Index naturally faces upward pressure. However, after experiencing the most difficult test last year, the issue of major shareholder reduction is no longer the most important factor.

More importantly, there is a gap in expectations between US technology stocks and Hong Kong technology stocks. As Microsoft's better-than-expected performance drove up Nvidia's performance, it supported the rise of US stocks. However, Hong Kong technology stocks are currently limited by major shareholders and the game period of undisclosed performance, which has put pressure on them recently.

In fact, looking back at the performance of Hong Kong technology stocks in April each year, it is often flat, which may be related to the pace of performance disclosure. Judging from the performance of A shares in April, the investment focus is on high-quality stocks, special estimates, and AI, and the performance of technology stocks is all disclosed in mid-May. As the pace of economic recovery slows down and the market hotspots are not in Hong Kong stocks, uncertainty increases, and Hong Kong stocks therefore lack opportunities for speculation. After May Day, the trend of economic recovery will become more obvious.

Another influencing factor is the impact of the Fed's interest rate hikes on the market.

Although US CPI slowed significantly in March, the second-hand car market and housing sales in the US returned to year-on-year growth, and wage growth exceeded the growth rate of CPI, all of which showed strong economic performance. The market previously expected that the Fed would end its interest rate hikes after May, but the return of large consumer spending growth will push the Fed to continue to raise interest rates. However, from the first quarter reports of the cyclical industries, the economic recovery in the first quarter was not significant. For example, the performance of Sany Heavy Industry and Conch Cement was worse than last year. Investment banks have also lowered their expectations for the industry in the second quarter, adding to market concerns about economic recovery.

Conclusion

It is worth noting that the A-share market in May may have a different trend from the Hong Kong stock market, mainly because foreign capital dominates the pricing power of the Hong Kong stock market.

From the recent small range of fluctuations in the US stock market, the market is waiting for Powell to decide the direction of the end of the rate hike. In addition, US Treasury bonds will mature in June, and printing money to repay debts seems to be the only option, but this is contrary to the rate hike decision. Therefore, the US stock market is also in a state of policy uncertainty.

In this context, foreign capital has become more cautious, worrying about the extension of the rate hike cycle and political factors. Therefore, the performance of the Hong Kong stock market in May may be inferior to that of the A-share market, which also explains why the A-share market can often outperform the Hong Kong stock market in May during the rate hike cycle.