Hong Kong Stocks March Into Bull Market as Global Money Returns

(Bloomberg) — Hong Kong’s world-beating stock rally is showing no signs of letting up, with the city’s currency peg to the greenback burnishing its haven appeal amid the threat of higher-for-longer US interest rates.

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The Hang Seng Index jumped 2.5% on Thursday to enter a technical bull market, even without the presence of mainland Chinese buyers due to a holiday. The risk-sensitive Hang Seng Tech Index surged 4.4%, alongside developers and casino operators.

The strong showing came as global money managers rejig their portfolios due to a repricing of the Federal Reserve’s policy path, with the US central bank downplaying the potential for imminent rate hikes. Asian currencies have been hammered by the dollar’s extended reign, eroding equity returns in respective markets. As a result, some funds are rotating out of top-performing markets such as Japan and Taiwan and into Hong Kong.

Meanwhile, the dollar peg has sheltered the city’s assets from a selloff in global markets, with the Hong Kong dollar being one of the only two Asian currencies that saw gains over the past month versus the greenback.

The primary catalyst is a rotation “where global investors take profit from US, Japanese or global tech holdings and move into Chinese stocks to capitalize on a swift rebound,” said Richard Tang, China strategist at Julius Baer Group Ltd. “Traditionally, Hong Kong stocks see higher participation from global investors and this is likely to drive its near-term outperformance over the A-share market.”

That’s adding to tailwinds such as low valuations and supportive capital market policies from Beijing. The Hang Seng Index trades at just 8.5 times forward earnings, compared with nearly 20 times for the S&P 500 Index and 15.7 times for Japan’s Topix Index.

On Tuesday, China’s ruling Communist Party vowed to explore new measures to tackle a protracted housing crisis, which remains the biggest drag on the nation’s economy, and hinted at possible rate cuts ahead.

“The Politburo chatter around policy support is driving a change in short-term sentiment,” said Matthew Haupt, portfolio manager at Wilson Asset Management. “Investors had a day to digest the Politburo headlines and the neutral Fed, not hawkish, gives space for the rally.”

Chinese investors have been a crucial driver for Hong Kong stocks recently, with inflows from the mainland last month accounting for more than a third of total turnover, the highest on record. They’ve purchased HK$213 billion ($27 billion) of Hong Kong equities this year, about two-thirds of last year’s total, and as of Tuesday had sent net inflows to the city for 22 straight sessions.

The gains on Thursday, however, suggest the rally has broadened beyond just southbound inflows, as global money is returning to the financial center’s cheaply-valued market.

“The fast market rally since mid-April was first supported by strong Southbound buying. Now it appears a more diversified investor base is joining today’s rally,” said Linda Lam, head of equity advisory North Asia at Union Bancaire Privee. More market-friendly policies could be rolled out over the next few months to support the Hong Kong market, she added.

–With assistance from April Ma and Ishika Mookerjee.

(Updates with closing prices.)

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