Business

Hong Kong stock market regains favor on hopes of market recovery

HONG KONG – Hong Kong Exchanges and Clearing (HKEX) is having its best week in years.

China's latest promise to increase liquidity in the financial hub as well as strong profits is raising hopes that the stock markets' worst days are behind them. The stock has climbed about 16% so far this week, the best performance since hopes of China's Covid-19 reopening in late 2022.

There was an influx of funds from the mainland into Hong Kong stocks as traders began buying the dip earlier in 2024. Chinese regulators have pledged to encourage companies to list on the financial hub and diversification measures following the weakening of the yuan also supported the market. This could improve IPOs and average daily turnover for HKEX, reversing the sharp declines seen in the stock since the start of 2023.

Although Beijing's plans will have a limited impact on revenue in the short term, they could further strengthen HKEX's unique position in connecting China and the world, wrote UOB Kay analyst Kenny Lim Hian, in a note dated April 25.

Strong profits in the three months to March, helped by higher-than-expected investment income, add to the shares' attractiveness. Analysts expect continued revenue momentum driven by a more sustainable recovery in average daily revenue and a broader revaluation of stock market valuation.

Chinese investors bought more than HK$74 billion (S$12.8 billion) worth of stocks in April through trade links to the south, according to data compiled by Bloomberg. This helps make Hong Kong stock indicators one of the best performing major indices in the world this month.

Nonetheless, the HKEX stock price remains 56% below its 2021 high, suggesting more developments to come.

Analysts at Goldman Sachs Group expect average daily revenue to bottom in the first half, which would likely lead to higher earnings per share estimates. Spot stock trading is the main driver of the company's profits, accounting for almost a third of revenue.

HKEX management's reforms towards a narrow bid-ask spread would have the potential to reduce friction in the system and therefore increase turnover speed and, therefore, average daily equity turnover, a wrote Goldman analyst Gurpreet Singh Sahi in a note. BLOOMBERG

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