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Conclusion: We are fading consensus calls for Santa Claus by shorting Hong Kong as the domestic and global macro fundamentals are likely to continue deteriorating over the intermediate term. 

 

Position: Short Hong Kong Equities (EWH)

Earlier today, Keith shorted the Hong Kong equity market in our Virtual Portfolio. Putting on exposure to this increasingly high-beta market is a sign of our conviction in our research, specifically in our thesis that global growth is continuing to slow – particularly across Europe and Asia. Irrespective of consensus calls for a monster beta-chase into year-end, our proprietary analysis suggests that global macro fundamentals are highly likely to continue deteriorating over the intermediate term TREND and shorting Hong Kong remains one of our favorite ways to play this view.

It’s worth noting that when the same people (i.e. consensus) are telling you that “all the bad data is priced in, so stocks must go up” are the same exact people that told you “everything is fine, so stocks must go up” six months ago, you should be, at a minimum, concerned.

Going back to Hong Kong specifically, it has remained one of our top Asian short-ideas since May for the following factors: 

  • A) Pronounced domestic stagflation will continue to compress corporate earnings growth over the intermediate term;
  • B) An inflecting property market will weigh on credit quality across the banking sector; and
  • C)  Slowing global growth will weigh on Hong Kong economic growth, which is among the world’s top two trade-oriented economies. 

Point A:

Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year - 1

 

Point B:

Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year - 2

 

Point C:

Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year - 3

We encourage you to review our recent work on this idea and the associated thematic analyses: 

Lastly, our proprietary quantitative risk management levels are included in the chart below.

Darius Dale

Analyst

Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year - 4