9988.HK 0388.HK
The Hang Seng plunged 28.6% in the year of the rabbit, hurt by China’s slow economic recovery and simmering tensions with the United States. Investors will be looking for a rebound under the auspicious sign of the dragon

The Hang Seng Index plunged 28.6% in the year of the rabbit, hurt by China’s slow economic recovery and simmering tensions with the United States. Investors will be looking for a rebound under the auspicious sign of the dragon

Key Takeaways:

  • Since its launch in 1969, the Hang Seng has always risen in the dragon years, with gains averaging around 14%
  • But any rally this time could be hampered by uncertainties over the U.S. presidential election and interest rate policy


By Fai Pui

Could the dragon breathe new life into Hong Kong stocks after investors ran scared in the year of the rabbit?

Market watchers will certainly be hoping for a stronger performance in what is considered a lucky year in the Chinese calendar. The only mythical creature in the Chinese zodiac, the dragon is associated with good fortune, strength and vigor, characteristics that have been sorely lacking on the Hong Kong stock market.

In the past year, Hong Kong share prices were unable to capitalize on the lifting of China’s Covid controls and were hammered by China’s weak economic recovery. Tensions with the United States over trade and technology also took a toll. In the lunar year that just ended, the benchmark Hang Seng Index (HSI) fell a whopping 28.6%, or 6,298 points, making it the worst year of the rabbit on record.

But the gloom lifted as China ushered in the year of the dragon. In the first three trading days, the Hang Seng rallied 593 points to break above the 16,300-point level. The propitious start could signal that the market is destined to have a better year.

There had been positive omens even before the new year. For example, the Chinese authorities pledged stimulus for the economy and the stock market, including a stabilization fund of two trillion yuan ($277.8 billion). Moreover, some foreign investors who had shunned Chinese companies started to have a change of heart. In the fourth quarter of last year, Canadian pension funds bought stocks in Alibaba (BABA.US; 9988.HK), Li Auto (LI.US; 2015.HK), JD.com (JD.US; 9618.HK) and NetEase (NTES.US; 9999.HK). Meanwhile, the investor Michael Burry, famous for his “Big Short” strategies, increased holdings in Chinese stocks such as Alibaba and JD.com through his hedge fund Scion Asset in the last quarter of 2023.

However, major investment banks and brokerage firms are being cautious in their new year stock forecasts. Although prices of companies listed in mainland China and Hong Kong have plumbed the depths, they could still have further to fall amid China’s uncertain economic recovery and strained relations with the United States. Also on the list of potential concerns are global geopolitics, the timing of a U.S. interest rate cut and the outcome of the U.S. presidential election.

Morgan Stanley predicts the HSI could trade between a high of 21,500 points and a low of 11,350 points. UBS sees a peak of 20,600 points, while China Everbright International and Futu put the high at 21,000 points. HSBC and KGI Asia see the market capped at 19,890 points and 19,260 points respectively.

Curtis Yeung, a strategist at UOB Kay Hian (Hong Kong), says historical data indicates the market could be poised for an upswing, potentially reaching a maximum of 20,500 points in this dragon year. “Looking back at 30 years of HSI data, the market bottoms out when the price-to-earnings ratio is close to 8 times and dividend yield is around 5%, which is very similar to what we saw this January,” he said.

Yeung said new loan data in January came in higher than expected and he advised investors to look out for the point at which the Purchasing Managers’ Index (PMI) for China’s manufacturing industry returns to an expansionary reading above 50. It takes time for policy support to take effect, as was the case after a stock market rout in June 2015, he said. The PMI broke above the 50 level about half a year later, heralding a stock market recovery.

In market terms, the dragon has lived up to its image of strength and good fortune in the past. Since the Hang Seng was launched in November 1969, the index has always risen in the dragon years, for whatever reason, with an average gain of around 14%.

Under the Chinese zodiac, each animal sign is paired with one of five elements. In 1976, a year of the fire dragon, Hong Kong stocks rose 5%. Twelve years later it was the turn of the earth dragon. The index gained 33%, after initially falling when trade resumed after the Chinese New Year break. A similar start this year may inspire hope in some investors. However, returns were a meager 0.48% in the year of the golden dragon in 2000, rising to 15.44% in 2012 under the sign of the water dragon.

Those trading years were full of twists and turns. In turbulent 1976, the HSI surged more than 30% in the first quarter and did not recover from a subsequent plunge until political stability returned later in the year. Going into 1988, Hong Kong stocks were still feeling the pain from the Wall Street crash, when they had suffered a record one-day drop of 33.33% on Oct. 26, 1987. Hong Kong and global markets went on to recover in the year of the dragon.

In the US crosshairs

The dragon year of 2000 coincided with the dot-com boom. The listing of Tom.com (2383.HK), now known as Tom Group, was a sensation, as investors waited in line all night to get their hands on an IPO subscription form. However, the craze soon cooled and the technology bubble burst. The HSI scraped a return of 0.48% that year, although many dot-com investors were left nursing heavy losses.

The dragon came around again with plenty of drama in 2012. The Chinese government injected liquidity into the Hong Kong market, but the European debt crisis sent stocks into a spiral. By the middle of the year, governments in Europe, the U.S. and Japan resorted to printing money to ease the crisis. As the Chinese mainland economy recovered, the HSI finally rebounded nearly 5,000 points from a low of about 18,000 points.

This time, the year of the wood dragon promises to be challenging for the market. U.S.-China relations pose the biggest uncertainty, especially in the run-up to the U.S. presidential election, as calls for the candidates to endorse sterner policies against Chinese companies could intensify. The risk came into clear focus even before Chinese New Year, when lawmakers from both U.S. parties called for sanctions against WuXi Biologics (2269.HK), sending the biotech’s share price tumbling.

Recently, it was even rumored that President Joe Biden’s administration is considering restricting imports of Chinese new energy vehicles and parts. Market watchers say news of such measures could shake investor confidence this year.

The timing of a U.S. interest rate cut will also be critical. Rates are expected to stay steady in the first half of this year as U.S. economic data remains robust, but policy easing could start in June. Rate cuts could boost the performance of stocks listed in mainland China and Hong Kong, providing more room for the Chinese government to stimulate economic recovery.

Some analysts warn against investing in companies that could find themselves in the U.S. crosshairs in an election year, preferring stocks with a strong mainland focus.

“Investors should try to avoid stocks related to the U.S.-China rivalry in the year of the dragon,” said Dickie Wong, executive director of the research department at Kingston Securities. He singled out China Mobile (0941.HK) as a safer choice, with stable profit growth and a high dividend yield.

Curtis Yeung, on the other hand, believes that some battered technology stocks may be ripe for a rebound, having fallen to low levels. For example, Alibaba has a forward price-to-earnings (P/E) ratio of only 8 times but factoring in cash holdings worth HK$19 per share the ratio is just 5 times.

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