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Hang Seng Index predictions for 2020

By Elena Berton

Hong Kong’s benchmark index has been through a roller-coaster 2019 marked by anti-government protests and an economic downturn. What's in store for the Asian finance hub in 2020?

The Hang Seng is the market-cap weighted index that tracks 50 major companies listed on the Hong Kong Exchange. These include local Hong Kong companies, many mainland Chinese companies such oil company CNOOC, as well as UK bank HSBC.

It debuted in November 1969 after the chairman of Hang Seng Bank decided to create a Hong Kong version of the Dow Jones index in the US.

Since its inception 50 years ago it has risen around 16,700 per cent, according to Hang Seng index analysis compiled by Bloomberg.

During the past five decades its constituents have evolved from local companies to Chinese mainland groups, which now make up around half of its market value.

As a result, it has become a proxy of China’s economy.

A roller-coaster 2019

After a roller-coaster year, it ended 9.1 per cent higher on December 31, 2019, despite a period marked the US-China trade conflict, anti-government protests and the global economic slowdown.

Still, it underperformed the mainland’s Shanghai Composite Index, which closed 2019 up 22.3 per cent, as well as other benchmark indexes such as the S&P 500, the FTSE 100 and the CAC 40 index, which have risen 28.5 per cent, 12.8 per cent, and 26.5 per cent respectively.

After a bright start in the first quarter of 2019, the Hang Seng slid 9.4 per cent in May – its worst month – when US-China trade talks fell apart.

Sweeping street protests that began in June kept investors on the edge throughout the year, as local retailers were forced to shutter during the rallies and high-spending Chinese tourists stayed away.

Unsurprisingly, the territory’s economy fell into a technical recession in the third quarter, when Hong Kong’s GDP fell 2.9 per cent, and the government now expects it to contract in 2019, the first time in a decade.

Against this tough backdrop, the performance of Hong Kong stocks in 2019 was “indeed a miracle”, according to Andrew Wong, chairman and CEO of brokerage Anli Securities.

Property companies under pressure

How is the Hang Seng index outlook shaping up for 2020?

Hong Kong stocks are likely to underperform their mainland-listed peers in 2020 as political uncertainties continue to weigh on the local economy and dent investors’ confidence, analysts say.

Hong Kong property companies and their share prices have come under a lot of pressure in 2019. One example is Henderson Land Development, whose share price has lost 18 per cent of its value since hitting its year high in April 2019.

This is in contrast with casino operators such as Galaxy Entertainment Group, which derive all their revenues in Macau, or Chinese banks and technology companies, which are mainly active on the mainland and have been relatively shielded from the downturn in Hong Kong.

If the protests grow in 2020 or there is more negative Hang Seng index news, its constituents could underperform more this year.

Damaged economy

However, since December investors seem to have shrugged off the effect of the protests and instead focused on the truce between Washington and Beijing, which has eased trade tensions.

But even though political unrest in Hong Kong is expected to ease in 2020, the damage to the city’s economy will linger this year.

Profit and revenue growth for Hong Kong companies in 2020 will definitely be worse than those of their Chinese counterparts, say UBS Global Wealth Management analysts.

They are forecasting returns in “low teens” for Chinese-listed companies this year and a low single-digit gain for Hong Kong-listed ones.

Helen Qiao, chief Greater China economist at Bank of America Merrill Lynch, agreed. “While we’re expecting some stabilisation of the current situation and the end of most of the type of disruptive activities to businesses, we think, however, the ramifications will probably linger for the next at least two to three quarters,” she said in her Hang Seng index forecast.

The Hang Seng Index is up 1.6 per cent since the start of the year but at 28,638.20 it remains below its peak of 30,157.49 in April 2019.

It’s also trading well below a gauge of the biggest companies listed in the Shanghai and Shenzhen exchanges, which have risen 29.4 per cent.

Trade war truce

This gap is likely to continue despite expectations of slower economic growth in China and Hong Kong stocks trading at a low valuation, which could offer entry points for bargain-seeking investors, analysts say.

Hannah Anderson, a global markets strategist at JPMorgan Asset Management, said investors are looking for “what they can pick up on the cheap”, adding that the recovery in Hong Kong stocks could extend into early 2020.

Whether the positive Hang Seng index trend will continue during the rest of 2020 will depend on the next step of the US-China trade negotiations, analysts agree.

“Although the performance of Hong Kong stocks has been pressured, the Hang Seng index can still stabilise if the two sides continue their discussions and narrow their differences. The Hong Kong stock market outlook still has conditions for a rebound,” Hang Seng Bank analysts wrote in their stock market outlook for 2020.

Chinese Vice Premier Liu He will be in Washington on January 13-15 to sign a phase-one deal that would significantly de-escalate the ongoing trade war between the world’s two largest economies.

If a truce is achieved, it’s expected to boost global markets and brighten the cloudy outlook for Hong Kong’s economy.

Anli Securities’ Wong cautioned that if President Donald Trump is re-elected in November, the trade war between the two countries may turn into a “cold war”.

If this is the case, Hong Kong may become a bargaining chip between China and the US in 2021.

“Hong Kong's real winter may not come until the fourth quarter of 2020 or 2021,” he said.

FURTHER READING: Nikkei index predictions for 2020 and beyond

FURTHER READING: CAC 40 index predictions for 2020

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