Tuesday, August 22, 2023
Additional content is provided by John Lohse, CFA
- The Hang Seng Index (HSI), Hong Kong’s benchmark stock index, finished last Friday’s trading session in bear market territory.
- As of the end of last week, the HSI has shed 20.9% since its January 27, 2023, high of 22,688.9, meeting the technical definition of a bear market.
- Economic woes in China have left the index on shaky ground.
Investors are growing increasingly cautious over China’s problematic economy. Those fears have been wreaking havoc on the HSI where many large Chinese-incorporated companies list their shares for foreign investors. As of August 21, the HSI has declined 10.9% year-to-date, 12.2% for the month, and 22.3% from its January 27 peak. The index hasn’t traded at levels this low since November 28, 2022. The chart below highlights 1-year price action of the HSI.
China is facing a deluge of negative economic data. Both consumer and producer prices (measured by the CPI and PPI) declined into a deflationary state last month for the first time since 2020. Consumer prices declined 0.3% year over year (YOY), while producer prices sunk for the tenth consecutive month, coming in at 4.4% YOY. Both exports and imports have declined YOY as well. Perhaps most noteworthy, has been the crisis engulfing property developers Evergrande, which filed for Chapter 15 bankruptcy protection in New York last week, and Country Garden Holdings, which recently missed bond coupon payments. Country Garden is set to be removed from the HSI in September.
LPL Research maintains its underweight to emerging markets equities. China makes up roughly 30% of the MSCI Emerging Markets (EM) Index and has many visible headwinds. The MSCI China Index has declined over 51% since its February 2021 highs. While we’re less favorable on broad-based passive investing in EM, we do recognize that active management in EM can provide attractive opportunities. Faltering China sentiment and global supply chain de-risking have contributed to a resurgence for Latin American and other Asian countries, including India, which have seen increasing economic investment. As the Hang Seng Index bears the brunt of an ailing Chinese market, investors have been waiting to see if the central government of the world’s second- largest economy will enact large-scale economic reforms. While those investors wait, however, many of them are choosing to do so outside of the Hong Kong stock market.
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