China Reform, Global Growth Seen Lifting Hong Kong Stocks

Hong Kong stocks are poised to gain in 2014, with the Hang Seng Index climbing to a five-year high on a stronger global economy and steady growth in China as it pushes forward with policy changes, according to strategists.

The city’s benchmark equity index will advance 10 percent to 25,658 this year from the end of 2013, according to the average of eight analyst estimates compiled by Bloomberg. Mainland shares traded in Hong Kong may climb even further, with Credit Suisse Group AG predicting the Hang Seng China Enterprises Index, also known as the H-share index, will surge 39 percent from Dec. 31. RBC Investment Management (Asia) Ltd. said the health-care and clean-energy industries will benefit from policy shifts in China.

The Hang Seng Index climbed 15 percent from its 2013 low in June through last week amid confidence in the world’s two largest economies. The gauge traded at 10.1 times estimated earnings at the end of last week, while the H-share index’s 7 times multiple was the cheapest among benchmark gauges in Asia. China’s policy makers in November unveiled the biggest reform package since the 1990s, boosting shares, before surging funding costs weighed on markets at year-end.

“It will be a steady year for Hong Kong in 2014 because China’s talking about so many reforms being implemented over the next five years,” said Teresa Chow, a fund manager who helps oversee $1.5 billion at RBC Investment. “U.S. data is showing a positive trend and growth is on track, which is positive in general for Asian markets.”

One-Child Policy

China’s Communist Party leadership on Nov. 15 detailed changes including easing the one-child policy and scrapping aspects of the household registration system, or hukou, that impeded migration between towns and small cities. Lawmakers are also ending a ban on mainland stock listings and seeking to curb pollution.

Shares of Sihuan Pharmaceutical Holdings Group Ltd., a Beijing-based drugmaker, more than doubled in Hong Kong last year. Diaper-maker Hengan International Group Co. and milk producers China Mengniu Dairy Co. and China Modern Dairy Holdings Ltd. all jumped at least 3.4 percent in the week following the policy announcement.

Record Smog

Wind-farm operator China Longyuan Power Group Corp. soared 86 percent last year to lead gains on the H-share index, while Hanergy Solar Group Ltd. more than doubled. Even after the surge, HSBC Holdings Plc and Citigroup Inc. say clean energy remains attractive on long-term growth prospects.

Development of hydroelectric, wind and solar power will be accelerated this year, the National Development and Reform Commission said Dec. 10, after Shanghai saw record levels of smog that forced flight cancellations and vehicles off the road.

The Shanghai Composite Index of Chinese shares traded mainly by local investors will rise 22 percent this year, according to the median forecast of four securities firms that provided targets for the gauge.

The measure slid 1.8 percent to 2,045.71 today, while the Hang Seng Index fell 0.6 percent to 22,684.15.

The benchmark gauge of Hong Kong equities sunk 8.2 percent in the first half of 2013 to trail 23 other developed markets tracked by Bloomberg, before rebounding 12 percent in the next six months.

Economy Strengthens

China’s economy emerged from a two-quarter slowdown in the three months through September, with factory output in August reaching the fastest pace in 17 months.

The nation’s government said at last month’s annual Central Economic Work Conference it will seek “reasonable” growth. The nation will set a goal of 7.5 percent expansion for 2014, the same as last year, Caixin reported on its website on Dec. 16.

“China is going to concentrate on quality of growth rather than blindly follow GDP figures,” said Francis Lun, chief executive officer of local brokerage GEO Securities Ltd. “There will be growth pains for the market.”

Infrastructure and raw material stocks will suffer as local governments spend less on building, while Internet and phone companies will rally as users increase in China, he said.

Official gauges of China’s manufacturing and services industries declined in December to four-month lows, data showed last week. Both measures remain above 50, indicating the industries are still expanding.

Global Recovery

Shares listed in Hong Kong will benefit from the recovery in the U.S. and Europe, according to Arthur Kwong, the head of Asia-Pacific equities at BNP Paribas Investment Partners. Techtronic Industries Co., a power-tool maker that gets most its revenue from North America and Europe, is one of his picks, he said. The stock rose 53 percent last year.

The U.S. jobless rate fell to a five-year low in November and gross domestic product climbed to its strongest since 2011 in the third quarter of 2013, giving the Federal Reserve the confidence to trim monthly bond purchases. The euro-zone showed signs of emerging from its record-long recession as manufacturing reached a 31-month high in December, according to London-based Markit Economics Ltd.

China Life Insurance Co. and Ping An Insurance (Group) Co., the two largest companies in the industry, surged at least 9.4 percent from when reform measures were unveiled on Nov. 15 through Dec. 31.

Insurance Reforms

The Finance Ministry said on Dec. 6 that contributions to employer pension plans will become tax deductible. The rule change may double assets in such funds, 47 percent of which are managed by insurance companies, according to Ping An Securities Co. The industry will also gain as low insurance penetration allows room for growth, Credit Suisse said last month.

While mainland Chinese firms traded in Hong Kong are likely to benefit from reform measures, the city’s companies face headwinds this year, according to Credit Suisse. A potential rise in interest rates remains a threat to local property prices, while gaming stocks that led gains last year on the Hang Seng Index are becoming expensive, the bank said in a research note dated Dec. 6.

Stocks fell in December, with the H-share index erasing almost all its gains since reform details were announced. Money-market rates surged to their highest since June, when funding costs climbed to a record.

Shadow Banking

Chinese Premier Li Keqiang is cracking down on less-regulated shadow banking activities, estimated by JPMorgan Chase & Co. at $6 trillion in May last year, while the central bank engineered the June cash crunch to push deleveraging in the world’s second-largest economy. China’s audit of local governments exposed an increased reliance on shadow banking, swelling the risk of default on 17.9 trillion yuan ($3 trillion) of debt, National Audit Office data showed.

China wants to support growth and will not let a liquidity squeeze destabilize the market, according to Calibre Asset Management Ltd.

“Major economies like the U.S. have been able to recover further while China maintains its relatively high growth,” said Norman Chan, head of investment at Calibre Asset. “That means it bodes well for global growth and Hong Kong is a very open economy so it will benefit as well. The Hang Seng Index has good chance to easily reach 27,000 or 28,000 by the end of 2014.”

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