Down for 4 straight years, will the Hang Seng index capitulate?

The Hang Seng index continued its downward trend in 2023 as hopes of a swift recovery of the Chinese market fizzled. The index plunged by more than 16% in 2023, diverging with its global peers like the Nasdaq 100 and S&P 500, which rose by 52% and 24%, respectively. 

The Hang Seng index also trailed its Asian peers like India’s Nifty 50 and South Korea’s KOSPI jumped by over 16%. Its total market cap also dropped below that of the Nifty 50 index as India’s economic growth continues. The index has now dropped in the past four straight years.

Hang Seng vs global peers

The Hang Seng index, together with mainland ones like the Shanghai and China A50, has burnt many investors in the past few years as hopes of a recovery have fizzled over time.

That’s because the Chinese equity market has moved from one crisis to the other. There were large-scale protests in Hong Kong that pushed China to introduce the National Security Law in 2020. In the aftermath, many businesses moved their operations to other Asian cities like Singapore and Malaysia.

Further, there were challenging regulation issues in Chinese as the government cracked down on the tech sector. This crackdown continued on Friday as Beijing implemented more regulations in the gaming industry.

Further, the Hang Seng index tumbled because of the Covid-19 lockdowns in 2021 which led to a dramatic retreat of China’s economy. Most recently, it has been affected by the country’s real estate crisis which has impacted most developers.

Country Garden and Evergrande, two of the biggest developers are on the verge of collapsing. The same is true with many other companies in the industry like CIFI and Sunac are also at risk.

Chinese authorities have started to implement policies to save the industry but there are concerns about the impact. As part of the strategy, the central bank will provide as much as $137 billion in funds to shore up the industry. Banks, which are also highly exposed, will need to increase their lending to developers.

There are other reasons why Hang Seng has become a toxic wasteland in the past four years. For example, there are increased risks that China will invade Taiwan in the coming years and the implications. There are also concerns about the ongoing tensions with Washington.

Most Hang Seng index companies were in the red in 2023. Some of the worst performers were companies like Li Ning, Country Garden Services, Meituan, WuXi Biologics, and JD. All these stocks crashed by over 50%. Other notable laggards were JD Health, Budweiser, Ping An, and Hang Lung Properties.

Hang Seng chart by TradingView

Therefore, the question is whether the Hang Seng index sell-off will capitulate in 2024. Some analysts believe that the index will bounce back in 2024 now that most stocks are highly undervalued.

However, there are concerns that the index could once again disappoint in 2024 as risks continue. Therefore, I suspect that the index will continue underperforming during the year, with the next point to watch being at H$14,588, the lowest point in November 2022. This price is about 10% below the current level.

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