Is the time right to buy Hong Kong stocks?

As of 11th December 2023, Hong Kong stocks continued their decline following a significant drop in consumer prices in China, the sharpest in three years.

This has raised worries about the potential impact of deflation on corporate earnings and margins. Investors are closely watching the Federal Reserve's upcoming rate decision in its final meeting of the year.

At the local noon trading break, the Hang Seng Index fell by close to 2% to 16,000.84, marking its lowest level since early November of the previous year. The Tech Index also experienced a 2.6 percent decline, and the Shanghai Composite Index slid by 0.6%.

Tencent (700:HK) lost 2% to HK$299.40, Alibaba Group (9988:HK) declined 3.5% to HK$68 and e-commerce peer JD.com (9618:HK) tumbled 7.1% to HK$97.40. Macau casino operator Galaxy Entertainment (27:HK) slipped 2.3% to HK$40.95, while peer Sands China (1928:HK) weakened 1% to HK$20.85.

Li Ning (2331:HK), the sportswear manufacturer, experienced a significant 13.6% decline, closing at HK$18.44. This followed the company's acquisition of a 25-storey mixed office and retail building in North Point, Hong Kong, from Henderson Land for HK$2.2 billion (US$282 million), intended for housing its headquarters.

According to the statistics bureau in Beijing, consumer prices registered a 0.5% decline in November compared to the same period last year, following a 0.2% drop in October. This marks the most significant decrease since November 2020 when there was a 0.5% decline. BCA Research suggests that deflation could negatively impact profit margins and corporate earnings, potentially resulting in layoffs.

Over the past one month, the Hang Seng Index has experienced a c.7% decline, resulting in a total loss of c.19% for the year, marking the highest among major global stock indices according to Bloomberg data. Moody’s recently downgraded China’s rating outlook and also adjusted the outlook for many of the nation’s largest lenders.

Looking ahead, the Federal Reserve's rate-setting committee is scheduled to convene on Wednesday. Based on data compiled by CME Group from contracts on Fed fund futures, policymakers are anticipated to maintain the key rate within the 5.25% to 5.5% range.

So back to the big question, is it a good time to finally buy the dip?

Opportunities:

Valuation: Hong Kong stocks are currently trading at relatively low valuations, which could make them attractive to bargain hunters.

Strong corporate earnings: Many Hong Kong companies have reported strong corporate earnings in recent quarters.

Potential easing of trade tensions: There are some signs that the US and China may be willing to ease trade tensions, which could boost investor confidence.

All in all, the outlook for Hong Kong stocks is uncertain. There are both risks and opportunities to consider. If you are a long-term investor with a high risk tolerance, then you may be willing to buy Hong Kong stocks now. However, if you are a risk-averse investor, then you may want to wait until the market becomes more stable.

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