HK equity funds maintain lustre – for now

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Mutual funds invested in Hong Kong equities have outperformed the rest of Greater China in the long-term, but face rising headwinds.

Resilient Hong Kong

Overall, the Hong Kong equity fund sector has been resilient during a turbulent three years for most global equity markets, where strong performances in 2017 were often followed by sharp declines in the second half of 2018. A “relief rally” in the first four months of this year, prompted by an emollient US Federal Reserve, subsided rapidly in May as investors panicked about an escalation of the US-China trade dispute.

Greater China equity funds have been at the frontline of these shifting sentiments, because the region’s investible companies are most directly affected by tariffs,  whether as manufacturers or as contributors in supply chains. Moreover, businesses are likely to stall strategic investment plans and consumers to delay major purchases while uncertainty persists.

Hong Kong share prices are especially vulnerable. The territory is the locus for many multinational companies and financial firms in the region, as well as a major conduit for mainland China exports. Also, several major China companies, such as Tencent and Petro China are listed as H-shares on the Hong Kong Exchange.

Now, of course, the world’s attention is on the mass demonstrations against the Hong Kong government’s planned legislation that would allow extradition from the territory to the mainland.

Social unrest, nervousness about Beijing’s response, US threats to abandon its special treatment of Hong Kong and the extradition law itself are further reasons for investor nervousness – on top of the trade dispute, a weakening renminbi and fears of an economic slowdown in China.

The benchmark Hang Seng index slumped 9.4% in May according to Bloomberg data, and after a short-lived recovery earlier this month, it dropped 1.7% on Wednesday as the street protest was live-streamed across the world.


Average performance of Hong Kong equity funds v other Greater China equity sectors and the international equity sector

Source: FE Analytics. Average three-year cumulative returns in US dollars.

 

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