Hong Kong’s Muted Stock Swings Stand Out Amid Global Turbulence

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(Bloomberg) — Just as stocks everywhere are being whipsawed by concern that the spreading coronavirus outbreak could bring global economic growth to a standstill, Hong Kong equities have shown relative stability.

The hasn’t seen a move exceeding 3% in either direction in six months, while the S&P 500 Index has posted moves of that magnitude in four out of its past seven sessions. Equity traders aren’t really rushing to hedge against further swings either: an index of expected volatility has remained below its U.S. counterpart for seven consecutive days, the longest stretch since late 2018. The VHSI Index is also about 10 percentage points lower than Europe’s VStoxx volatility gauge.

Cheaper valuations, a currency peg that limits foreign exchange risks and optimism that the city has the virus situation under control are cited as factors that may make its stock market an attractive investment. Trading near the lowest versus the rest of the world in 16 years, Hong Kong’s beaten-down stocks may be poised to benefit from a rising tide of foreign cash.

“If we have a global easing environment, foreign investors would come to Hong Kong,” said Louis Tse, managing director at VC Asset Management Ltd. “We are talking about 10 times price-to-earnings here, which is a good entry point.”

The Hang Seng Index rose 0.1% by the midday break Wednesday, after the S&P 500 index tumbled almost 3% in the wake of a 50 basis-point interest rate cut by the U.S. Federal Reserve, which failed to ease concerns about an economic downturn. The Hong Kong Monetary Authority cut its benchmark interest rate in line with the Fed. As the Hong Kong dollar is pegged to the greenback, the city essentially imports U.S. monetary policy.

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According to Tse, rate cuts will further lower the return from the risk-free assets and encourage yield-hungry investors to look elsewhere to generate income. Along with the Fed, Group of Seven finance chiefs have also said they’re ready to act to shelter their economies from the spreading coronavirus.

Hong Kong stocks are cheaper for a reason. Months of political unrest over China’s role in the city pushed it last year into its first annual recession in a decade, with economists forecasting a second annual contraction in 2020 as disruptions from the coronavirus outbreak further depress output. The double whammy of the protests and the virus has led to a wave of retail closures and layoffs.

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Flows from the mainland have already turned stronger, with traders having snapped up HK$61 billion of the city’s shares last month, the most since January 2018, according to data compiled by Bloomberg. That came as foreign traders dumped mainland shares at a record pace to lock in China’s recent rally.

Hong Kong’s shares have recently lagged those in China by the most in more than three years. On Wednesday property-related stocks such as China Overseas Land and Investment Ltd. and Link REIT led gains on the Hang Seng Index.

“Chinese A shares are driven by domestic liquidity, while the Hong Kong market is driven by both domestic and global funds. So aggressive rates cuts by global central banks would be helpful for Hong Kong stocks in the near term,” said Michael Liang, chief investment officer at Foundation Asset Management (HK) Ltd.

“But over the mid-to-longer term, it depends on whether the virus will go away.”

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