Conclusion: We continue have a fundamentally negative outlook for the slope of Asian economic growth over the intermediate-term TREND and trading Hong Kong with a bearish bias around our quantitative levels remains our favorite way to play that view on the equity front.
Earlier this afternoon, Keith covered our short position in Hong Kong equities in our Virtual Portfolio for a decent gain vs. our cost basis. We continue have a fundamentally negative outlook for the slope of Asian economic growth over the intermediate-term TREND and trading Hong Kong with a bearish bias around our quantitative levels remains our favorite way to play that view on the equity front.
As mentioned in prior notes, we specifically like Hong Kong on the short side (relative to other alternatives) because of the following domestic factors/catalysts:
- Pronounced domestic stagflation will continue to compress corporate earnings growth over the intermediate term;
- An inflecting property market will weigh on credit quality across the banking sector; and
- Slowing global growth will weigh on Hong Kong economic growth, which is among the world’s top two trade-oriented economies.
We’ve been bearish on Hong Kong equities in print since May 24th and, since then, that research/risk management has produced a substantial amount of alpha (Hang Seng Index down -19.7% vs. a median decline of only -10.5% across Asia’s other benchmark equity indices).
For those of you less familiar with our thoughts here, we encourage you to review our research on this idea and the associated thematic analyses:
- 5/24: Hong Kong Is Not Mainland China: https://www.hedgeye.com/feed_items/13602
- 9/27: Shorting Hong Kong Equities: Trade Update: https://app.hedgeye.com/feed_items/15942
- 10/25: Global Growth Update: Incremental Deterioration Forthcoming?: https://app.hedgeye.com/feed_items/16428
- 11/15: Trade Update: Santa Claus Isn’t Coming to Hong Kong This Year: https://app.hedgeye.com/feed_items/16828
- 11/22: Asia Isn’t Buying Into Santa Claus: https://app.hedgeye.com/feed_items/16957
Lastly, our proprietary quantitative risk management levels are included in the chart below.