Conclusion: Hong Kong looks ripe for a bullish trade.
Position: Long Hong Kong equities (EWH).
Down -17% from when turned outwardly bearish on the Hang Seng, we are well aware of the bear case for Hong Kong. That puts us a unique position to have an educated view on the catalysts that could get this thing turned around – specifically on the growth/inflation front.
The immediate-term catalyst calendar looks favorable (views based on our models and global macro outlook):
- JAN 10: DEC Chinese exports should continue to slow and lower expectations for the following week’s growth data;
- JAN 11: DEC Chinese CPI and PPI should show continued disinflation and create incremental room for China to ease monetary policy;
- JAN 16: DEC Chinese industrial production, retail sales, fixed assets investment data and 4Q11 real GDP should all slow at a slower rate and may even surprise depressed consensus estimates to the upside;
- JAN 19: Hong Kong unemployment rate should continue to back up, though only marginally;
- JAN 20: Hong Kong CPI should continue to slow on the strength of King Dollar’s increase in purchasing power, which the Hong Kong dollar is pegged to; and
- JAN 26: Hong Kong exports should continue to slow at a slower rate and on a lag to a pickup in manufacturing.
From an intermediate-term perspective, buying the EWH with the Hang Seng less than -0.3% shy of our TREND line of resistance does indeed suggest we believe in the index’s ability to break out above the TREND line on the strength of the aforementioned macro calendar. As Chinese and U.S. economic growth bottoms in 1Q12 (China = 52.7% of Hong Kong’s export demand; the U.S. = 11%), we look for Hong Kong manufacturing and shipping orders to accelerate ahead of reaccelerating end demand in the coming months. To that tune, manufacturing slowed at a slower rate in DEC, with the PMI reading ticking up to 49.7 vs. 48.7.
Growth slowing at a slower rate is a leading indicator for a reacceleration in growth.