Hong Kong stocks will extend a rally after touching a 2 1/2-year high on optimism for China’s biggest package of policy changes since the 1990s and a stronger global economy, according to investors from JPMorgan Asset Management to Pictet Asset Management (HK) Ltd.
The benchmark Hang Seng Index rose 0.4 percent to 23,881.29 today, its highest close since April 2011. The gauge jumped 3.7 percent since Nov. 15, when China’s Communist Party unveiled reforms including easing the one-child policy and measures to develop capital markets. Goldman Sachs Group Inc. raised its rating on the nation’s stocks to overweight on Nov. 26, while Credit Suisse Group AG said the equities are among its three top recommendations.
“I see a stabilization of the Chinese economy, and all the reforms coming out from the third plenum should support equities in Hong Kong going into 2014,” said Tai Hui, Hong Kong-based chief Asia market strategist at JPMorgan Asset Management, which oversees about $1.5 trillion. “In the next 12 months I believe there will be momentum driving Hong Kong equities. Hong Kong is a very open economy, and improvements in the U.S. and Europe are going to be supportive.”
The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong rose the most among major equity indexes around the world from Nov. 15 through yesterday, climbing 6.4 percent with Citic Securities Co. leading gains. The policies outlined by China’s leaders improve the outlook for brokerages in the long term, Citigroup Inc. said.
China Life Insurance Co., the nation’s biggest insurer, and Ping An Insurance (Group) Co. led advances on the Hang Seng Index in the same period, with Credit Suisse saying the government’s plans will promote market-based pricing and the development of health and pension insurance.
Raw-milk producer China Modern Dairy Holdings Ltd. jumped 4.5 percent from Nov. 15 through yesterday, while China Mengniu Dairy Co. rose 4.2 percent after policy makers pledged to allow couples to have two children if either parent is an only child.
Seven of the 10 heaviest weightings on the Hang Seng Index are Chinese companies, including Internet business Tencent Holdings Ltd. and China Construction Bank Corp. Tencent surged 59 percent from its low this year on June 24 through yesterday, while China Construction Bank climbed 23 percent.
“The convergence of views on Hong Kong and China over the last couple of years has been very significant,” said Mark Konyn, the Hong Kong-based chief executive officer of Cathay Conning Asset Management Ltd., which oversees about $83.5 billion. “It’s difficult for Hong Kong now to differentiate overall in terms of sentiment from what’s going on in China in the current environment.”
The Hang Seng Index rose 5.4 percent this year, the smallest developed-market gain after Singapore’s Straits Times Index. Hong Kong shares sank in June to their lowest since September 2012 as China’s money-market rates surged to a record amid efforts to rein speculative lending.
China’s gross domestic product growth accelerated for the first time in three quarters in the period ended September. Premier Li Keqiang is “convinced” GDP will expand 7.5 percent in 2013, according to a speech to the Romanian parliament this week.
The Hang Seng Index traded at 11.4 times estimated earnings as of yesterday. The H-share gauge traded at 8.39 times, the second-cheapest in Asia after Pakistan’s Karachi Stock Exchange 100 index, according to data compiled by Bloomberg. The MSCI Asia Pacific Index trades at 14 times, compared with 16.3 on the Standard & Poor’s 500 Index.
Hong Kong shares also climbed amid signs of recovery in the U.S. and Europe. Data showed fewer Americans than projected filed for unemployment last week, a sign of resilience in the labor market. Germany business confidence this month rose to the highest since April 2012 while euro-area manufacturing expanded for a fifth month.
“Lots of investors have underweighted China so perceptions of a more sustainable reform path is obviously going to encourage global investors to get back in,” said Pauline Dan, head of greater China equities at Pictet Asset Management (HK). Pictet Asset manages about $151 billion globally. With a 2020 implementation target for reforms, “long term, we’re definitely positive, short term we may see some bumps along the road.”
Momentum from China’s policy shift may be tempered by Hong Kong’s property market. Prices have more than doubled since the start of 2009 amid record-low interest rates and lack of supply, prompting the government to impose extra taxes and tighten lending restrictions. Barclays Plc sees prices declining at least 30 percent by the end of 2015.
With the city’s currency pegged to the dollar, the real-estate market will face pressure as the Federal Reserve prepares to trim record stimulus, translating to higher interest rates and mortgage costs, BlackRock Inc. said last month.
“Hong Kong and China will attract incremental flows at a faster and higher rate than other markets in the region,” said Cathay Conning Asset Management’s Konyn. Hong Kong is “a liquid market, a well-functioning market that investors are very familiar with and overall it will be the preference to play China through Hong Kong.”