HONG KONG STILL LOOKS AWESOME

Takeaway: We maintain our bullish intermediate-term bias on Hong Kong’s stock market as the territory's GIP outlook remains particularly robust.

SUMMARY BULLETS:

 

  • Hong Kong’s GIP outlook continues to look as robust as any across the Global Macro universe and remains supportive of our TREND-duration bullish bias on the Hang Seng and we remain well above the Street on 2013 GDP and well below the Street on 2013 CPI. Random bearish catalysts aside (Google: “comedian + Italy”), Hong Kong remains one of our favorite ways to play our #GrowthStabilizing theme across Asia – along w/ China and Singapore. Refer to our 2/4 note titled, “ON A TEAR, WILL ASIA #GROWTHSTABILIZING CONTINUE TO WORK?” for more details.
  • It’s worth noting that all three of the aforementioned countries are somewhat (SGD and  CNY) to heavily (HKD) pegged to the rising USD, meaning that they will reap an outsized tailwind (more disinflation + more room to ease) from the continued popping of Bernanke’s Bubbles because their currencies won’t be under as much selling pressure as many other Asian and LatAm currencies are likely to experience in the [likely] upcoming era of sustained USD strength.
  • Additionally, as it relates to the risk of negative absolute returns if the Global Macro environment deteriorates substantially in the near-term, Hong Kong, Singapore and China all have limited downside relative to the rest of the region from a mean reversion perspective (as opposed to a Philippines, Thailand or Japan). Speaking explicitly, if you have to remain allocated to Asian and/or int’l equities, we think those three markets will offer the least amount of downside risk over the intermediate term.
  • Moreover, from a factor risk perspective, Hong Kong, Singapore and China’s forward-looking GIP outlooks all compare quite favorably (each in their own ways) with the top five factors most associated with equity market outperformance on a 1M basis. As such, it is reasonable to anticipate “the machines” will start bidding up these three markets over the intermediate term.

 

Official reports released overnight showed Hong Kong’s Real GDP accelerated in 4Q12 to +2.5% YoY from +1.4% in the prior quarter. On a QoQ basis, the Hong Kong economy accelerated +1.2% from +0.8% in the prior quarter. The positive deltas in both the YoY and sequential figures provides a great handoff to the start of 2013 and this favorable growth outlook is confirmed by the +47bps widening of Hong Kong’s 10Y-2Y Sovereign Yield Spread in the YTD.

 

HONG KONG STILL LOOKS AWESOME - 1

 

HONG KONG STILL LOOKS AWESOME - 2

 

Also reported overnight was Financial Secretary John Tsang’s announcement of HK$33 billion of one-off relief measures in the upcoming budget, including lower taxes and electricity subsidies. The measures also include food assistance and the waiver of two-month’s rent for public housing tenants and are expected to boost growth by +130bps. With a budget surplus worth 2.7% of GDP and a deficit/GDP ratio of 33% (both are ~at their respective 10yr averages) Hong Kong policymakers do indeed have the fiscal space necessary to implement the aforementioned stimulus measures without imposing any undue economic or political risks.

 

HONG KONG STILL LOOKS AWESOME - 3

 

Hong Kong’s GIP outlook continues to look as robust as any across the Global Macro universe and remains supportive of our TREND-duration bullish bias on the Hang Seng and we remain well above the Street on 2013 GDP and well below the Street on 2013 CPI. Random bearish catalysts aside (Google: “comedian + Italy”), Hong Kong remains one of our favorite ways to play our #GrowthStabilizing theme across Asia – along w/ China and Singapore. Refer to our 2/4 note titled, “ON A TEAR, WILL ASIA #GROWTHSTABILIZING CONTINUE TO WORK?” for more details.

 

HONG KONG STILL LOOKS AWESOME - HONG KONG

 

In line with our previous work on the territory, we typically start off our analysis of Hong Kong (and Singapore) from a top-down perspective at the international level. That’s because:

 

  • At 226% and 209% of GDP, respectively, Hong Kong and Singapore are far and away the most export-oriented countries in Asia – far more levered to global demand than other noteworthy Asian economies (China: 31.4%; South Korea: 56.2%; Japan: 15.2%; Thailand: 76.9%; and Taiwan: 66.9%);
  • The ratio of Hong Kong and Singapore’s share of world exports to their individual shares of world GDP are 7.1x and 6.5x, respectively – besting the next closest economy in Asia (Malaysia) on this metric by a full 3.7 turns; and
  • Singapore and Hong Kong are home to the world’s second and third-busiest container ports, handling 29,937,700 and 24,384,000 TEUs, respectively, per the latest yearly data from the American Association of Port Authorities (2011).

 

HONG KONG STILL LOOKS AWESOME - 5

 

With that in mind, our global #GrowthStabilizing theme should continue to auger well for the Hong Kong economy and its financial markets; we remain above the Street on 2013 World Real GDP growth.

 

HONG KONG STILL LOOKS AWESOME - WORLD

 

It’s worth noting that all three of the aforementioned countries are somewhat (SGD and  CNY) to heavily (HKD) pegged to the rising USD, meaning that they will reap an outsized tailwind (more disinflation + more room to ease) from the continued popping of Bernanke’s Bubbles because their currencies won’t be under as much selling pressure as many other Asian and LatAm currencies are likely to experience in the [likely] upcoming era of sustained USD strength. Refer to our 1/25 note titled, “WHERE IS THE “GREAT INFLATION” GOING TO COME FROM?” and our 2/20 note titled, “CURRENCY WAR UPDATE: THAILAND AND NEW ZEALAND SOUND THE ALARM BELL” for more details on this developing theme.

 

HONG KONG STILL LOOKS AWESOME - FX MoM

 

Additionally, as it relates to the risk of negative absolute returns if the Global Macro environment deteriorates substantially in the near-term, Hong Kong, Singapore and China all have limited downside relative to the rest of the region from a mean reversion perspective (as opposed to a Philippines, Thailand or Japan). Speaking explicitly, if you have to remain allocated to Asian and/or int’l equities, we think those three markets will offer the least amount of downside risk over the intermediate term.

 

HONG KONG STILL LOOKS AWESOME - Equities YoY

 

Moreover, from a factor risk perspective, Hong Kong, Singapore and China’s forward-looking GIP outlooks all compare quite favorably (each in their own ways) with the top five factors most associated with equity market outperformance on a 1M basis:

 

  1. Relatively more scope for monetary easing
  2. Relatively higher expectations for currency strength
  3. Relatively high growth
  4. Relatively low inflation
  5. A relatively strong currency

 

HONG KONG STILL LOOKS AWESOME - EQY FM

 

As such, it is reasonable to anticipate “the machines” will start bidding up these three markets over the intermediate term. Refer to our 2/11 note titled, “WHAT’S DRIVING OUTPERFORMANCE ACROSS ASIA AND LATIN AMERICA?” for a detailed walk-through of the methodology behind our bi-regional factor models.

 

From a quantitative risk management perspective, Hong Kong’s Hang Seng Index is bearish TRADE/bullish TREND and TAIL. breakout above the immediate-term TRADE line of resistance would confirm our bullish bias and a breakdown through the TREND line of support would force us to reconsider our base case scenario altogether.

 

Darius Dale

Senior Analyst


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