Hong Kong's stock market has made a remarkable comeback, with the Hang Seng Index surging over 7% in April and entering a bull market. This rebound marks a significant turnaround from the weak start to 2024 and years of heavy losses, which saw over $3 trillion wiped off the value of the city's stock market.
The improvement in Hong Kong's stock market can be attributed to an improving economic landscape in China, cheaper valuations, and a flurry of mainland investors putting money into Hong Kong to protect their portfolios from a weakening Chinese currency. Foreign inflows have also started to return, with investors becoming more optimistic about China's economic prospects.
The valuation of Hong Kong stocks has become more compelling relative to the rest of the Asian region, making them an attractive option for investors. Additionally, there has been a shift in investor sentiment, with Chinese economic data turning more positive and reports of Beijing rolling out a "real solution" for the crisis-ridden property sector.
China's economy is showing signs of recovery, with manufacturing activity growing at the fastest pace in 14 months in April. The Caixin/S&P Global manufacturing PMI rose to 51.4 in April, marking the sixth consecutive month of expansion. New export orders also recorded a solid increase due to improving global demand.
In the first quarter, China's gross domestic product grew 5.3% from a year ago, thanks to robust growth in high-tech manufacturing. The PMIs, which are a leading economic indicator, suggest improving momentum since the start of the year. Fiscal and monetary stimulus are also working their way into the economy, contributing to the recovery.
Beijing is also considering launching a national platform to acquire unfinished housing projects across the country, which would then be turned into affordable housing and sold or rented out. This move is seen as a positive step towards resolving the property sector crisis.
Chinese equities listed in Hong Kong are also appearing more attractive, particularly in comparison to Indian markets, which have been booming on the back of robust economic growth. Investors are starting to view India's valuation as "expensive," and outflows have been seen from India to China equities.
Hong Kong has also seen strong inflows of money from mainland China, where investors are concerned about further depreciation of the Chinese currency and mainland assets. The yuan has lost 4% of its value against the US dollar in the past year, leading investors to diversify their currency exposure by investing in Hong Kong-listed stocks.
Southbound investors have bought nearly $20 billion of Hong Kong-listed stocks in March and the first three weeks of April on a net basis. This trend is expected to continue, with mainland Chinese investors likely to diversify their holdings to non-RMB denominated assets during periods of RMB depreciation.
Overall, Hong Kong's stock market has made a significant comeback, driven by an improving economic landscape in China, cheaper valuations, and a flurry of mainland investors putting money into Hong Kong. The recovery in China's economy and the attractive valuation of Hong Kong stocks are expected to continue to drive the market's upward trajectory.
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