Stocks are a ‘falling knife’ without fundamental changes in China policy, regulatory and geopolitical risks, Natixis says

  • Hang Seng Index logged a 3.9 per cent gain this week, the most in 14 months on tech rebound
  • Investors may be catching a falling knife as tech crackdown, distress among mainland developers and poor US-China ties are still playing out

The rally in Hong Kong stocks in the early weeks of 2022 may flatter to deceive as the market remains a “falling knife” without fundamental changes in key policy and regulatory risks, according to French investment bank Natixis.

Analysts led by Hong Kong-based Alicia Garcia Herrero and Gary Ng said the gloomy picture on local equities could persist in the first half, even as rival investment banks and global funds including Goldman Sachs and BlackRock have turned more positive on the outlook for Chinese stocks traded in the mainland and offshore markets.

“Hong Kong’s equity market can still get worse before it gets better unless we see major changes in the current policy risk factors,” they said in a report to clients on Tuesday. “Investors have been busy rewriting the growth story of different sectors under the new regulatory normal, but the process is still on the way.”

The Hang Seng Index advanced 3.9 per cent this week, the biggest gain in 14 months, following a rebound in Chinese tech stocks on valuations appeal, recouping more than US$200 billion in market value. The benchmark slumped 14 per cent in 2021, the worst performance among major global stock indices.

China eased liquidity and borrowing costs last month and has pledged to prioritise efforts to stabilise growth since the economy lost momentum from mid-2021. Companies have also stepped up stock buy-backs to shore up prices, according to Bloomberg data.

Natixis Asia Pacific chief economist Alicia Garcia Herrero


Yet, fundamental changes in the Chinese technology and property sectors and geopolitical tensions between the US and China are needed as evidence before any sustained turnaround.

“Although IPO activities have flourished thanks to Chinese tech firms departing from the US, the sector as a whole is still facing tough headwinds from regulations, such as tougher antitrust rules, common prosperity and stricter data control,” Natixis added. “Developers are fighting for survival in front of the three red lines policy.”

The analysts said some “milestone events” on the regulatory front changes, such as the resumption of initial public offerings by internet-platform companies like Ant Group, subsiding credit risk among Chinese developers, and better US-China ties, would help improve sentiment.

China foiled Ant Group’s record-breaking stock offering in November 2020 in what is deemed as the start of its regulatory crackdown on the tech sector. The government introduced its “three red lines” policy against developers in August 2020 to rein in excessive debt and systemic risk in the financial system.

Some traders are clinging onto hope that Hong Kong stocks could recover this month, pointing to a surge in company buy-backs and cheap valuations. Some 192 firms bought back a combined HK$72.1 billion (US$9.2 billion) worth of their own shares, the most since 2002, according to Bloomberg.

“The surge in stock repurchasing activity indicates a bottoming phase in Hong Kong’s markets,” said Zhang Yidong, chief strategy analyst at Industrial Securities. “This month will mark a new dawn in Hong Kong market, with China’s goal to stabilise the economy being conducive for a rebound.”

Jasmine Duan, an analyst at RBC Wealth Management, is also cautious, saying the bottom line on regulations has yet to emerge. Reports this week showed a slew of developers were still raising refinancing red flags.

“Since the material deterioration of the property sector in October 2021, three months have passed without much meaningful action from the government,” she said in a note published on Thursday. While China’s overall macro policy stance will be neutral with an easing bias, “we do not expect a shift towards policy stimulus”.

Author: Cheryl Heng, SCMP

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