Photographer: Billy H.C. Kwok/Bloomberg

So Long to Hong Kong's World-Beating Rally

  • Hang Seng Index has erased almost half its advance in two days
  • City’s stocks face further downside, CMB International says

The rebound in Hong Kong stocks that briefly made them the world’s best performers is unraveling at an even faster pace.

The city’s equities have fallen 3.7 percent in the past two days, erasing almost half the gain from their May low through June 7. The rally was sparked by speculation the Federal Reserve would proceed slowly with interest rate increases and a second mainland exchange link would be unveiled. Stocks slumped as no start date for the Shenzhen tie-up was announced and concern that Britain may exit the European Union spurred a global selloff. The gauge lost a further 0.6 percent on Tuesday.

“The downside risk is higher than the upside potential from here," said Daniel So, strategist at CMB International Securities Ltd. The latest rebound didn’t have “fundamentals to support it except that expectations for rate hikes were pushed further back."

The Hang Seng Index’s jump from its May 19 low through last Wednesday was a fleeting bright spot, sending the gauge up 8.3 percent and above its 200-day moving average for the first time since July. The index and one tracking Chinese shares traded in Hong Kong took the two top rankings among 93 global measures tracked by Bloomberg over the span. Over the past year, both are among the 10 worst performers.

No Winners

With MSCI Inc. due to announce this week whether it will include mainland shares in global indexes, Ample Capital Ltd.’s Alex Wong says investors are realizing that regardless of which way the decision goes, Hong Kong stocks won’t be winners.

“We have topped and we will probably see further downside," said Wong, who helps oversee $100 million at Ample Capital. “Shenzhen-Hong Kong connect and expectations of A-share inclusion into MSCI had played a very important part in the rise but these two concepts aren’t too significant and stocks were being overbought."

Global equities have slumped the past two days. The Hang Seng Index’s 3.7 percent drop compares with a 2.2 percent slide for the MSCI World Index. The Shanghai Composite Index sank 3.2 percent on Monday as trading resumed after a two-day holiday last week.

More Disappointment

Traders are pricing in zero chance of the Fed raising rates at a meeting this week, down from 22 percent before a disappointing payrolls report on June 3. CMB International and Baring Asset Management said that the jobs figures had spurred investors to close bearish bets on Hong Kong stocks, adding buying demand that drove shares higher. With the city’s currency pegged to the dollar, its borrowing costs track U.S. rates.

It’s the second time this year that investors are seeing a rebound fizzle. The Hang Seng Index came within 2 percent of entering a bull market in April, rallying 18 percent from mid-February, before retreating. Looking over a longer time frame, the index has largely been stuck in a range since 2009.

“Many markets haven’t really done much but Hong Kong is probably one of the worst," said Michael Liang, Hong Kong-based chief investment officer at Foundation Asset Management (HK) Ltd., which oversees about $250 million. “Until there’s clear picture on China, I don’t think the Hang Seng will go anywhere soon."

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