Understanding the Market | How far has the Hong Kong stock market fallen?
How does the current Hong Kong stock market compare to previous bottoms? What can we expect in the future? First of all, some technical indicators are approaching extreme levels seen in previous bottoms! The support level for the Hang Seng Index on a monthly basis is around 14,600. However, for the rebound to be sustained, it still requires policy measures that are "appropriate" to the situation as a foundation.
Last week, there was a large-scale sell-off in the overseas Chinese stock market, bringing the market closer to the October low of 2022. The market weakness began on Monday when the MLF interest rate unexpectedly remained unchanged, further suppressing expectations for more supportive policies. This is a key factor in boosting confidence and sentiment.
Against this backdrop, lower-than-expected Chinese economic data for the fourth quarter, unnecessary selling of some funds, and other concerns may have contributed to the market sell-off on Wednesday.
So, where has the market fallen to? How does it compare to previous bottoms? What can we expect next?
Some technical indicators are approaching extreme levels seen at previous bottoms.
- Valuation: The Hang Seng Index's dynamic PE ratio of 7.4 times is second only to the 2008 financial crisis and the market bottom in October 2022. 2) Risk premium: It has risen to 9.9%, comparable to the bottom in October 2022. 3) The short-selling turnover ratio of 17.2% is second only to the bottom in October 2022, and the RSI and turnover rate are also close to previous market bottoms.
In addition, from a technical perspective, the monthly support level of the Hang Seng Index is around 14,600. However, if the rebound is to continue, it still needs policy support that addresses the current situation. Timely and strong fiscal support is needed in the current environment. The issuance of one trillion yuan of government bonds at the end of October 2023 and the PSL restart by the central bank in early January this year are both in line with the current situation. However, regardless of the form, sufficient strength is needed to achieve the desired effect.
Looking ahead, when the Federal Reserve starts cutting interest rates, US bond yields will have room to decline further (central range of 3.5% to 3.8%). This means that there is still room for policy easing and opportunities in the external environment. If policies are further implemented at that time, a certain degree of recovery and rebound can still be expected.
In terms of direction, more monetary easing corresponds to small-cap growth, while greater fiscal stimulus corresponds to cyclical and core assets. Conversely, if interest rate cuts and greater fiscal stimulus are not realized or fall below expectations, high dividends and a "dumbbell" strategy will still be attractive and may even continue to outperform.