A year to rebuild amid challenges

Hong Kong has gone through a difficult 2023, with subdued economic growth and laggard equity and property markets. Financial market pundits, however, are upbeat about the new year, expecting lower US interest rates and more accommodative monetary and fiscal expansionary policies to brighten up the day. Oswald Chan reports from Hong Kong.

Hong Kong has gone through a difficult 2023, with subdued economic growth and laggard equity and property markets. Financial market pundits, however, are upbeat about the new year, expecting lower US interest rates and more accommodative monetary and fiscal expansionary policies to brighten up the day. Oswald Chan reports from Hong Kong.

Amid increasing geopolitical tensions and tight financial conditions that weighed on exports of goods, as well as investment and consumption sentiment, Hong Kong's economic recovery following the normalization of travel and exchanges between the special administrative region and the Chinese mainland has not been as robust as anticipated.

The SAR government has revised the city's real GDP forecast downward - from 4 to 5 percent, to 3.2 percent for 2023. The local economy had seen three contractions from 2019 to 2022, but not in 2021.

The government will provide the GDP figure for 2023 when delivering the 2024-25 Budget in February.
While economists agree that Hong Kong's economic growth remains driven by the recovery in private consumption and tourism, they see global growth uncertainties hampering the pace of expansion in 2024.

"Hong Kong's growth depends heavily on global growth, trade and financial conditions, as well as the mainland economic growth," says William Deng, Asia and China economist at Switzerland-based investment bank UBS. He expects the city's economic growth rate to slow to 2.5 percent this year after jumping 3.6 percent in 2023.

"Global growth uncertainties affect Hong Kong's economic performance as world trade slows, especially high value-added trade, while the mainland's uncertain economic prospects would drag down the SAR's growth with weak mainland corporate-related capital market activities in the city," he says.

OCBC Hong Kong economist Cindy Keung predicts that Hong Kong's GDP will expand 3.2 percent for 2023, supported by the recovery of services exports and buoyant inbound tourism, as well as domestic consumption boosted by low unemployment and population inflow.
In her view, Hong Kong's economic growth in the new year will depend heavily on factors like US interest-rate cuts and the mainland's expansionary fiscal policies, rather than on the recovery of export of services and domestic consumption in 2023. Under these circumstances, the city's economy would expand 2.7 percent in 2024.

Hang Seng Bank believes that when central banks begin adopting a more accommodative monetary policy, more favorable financial conditions will emerge to support growing credit demand and contribute to the overall growth of Hong Kong's economy in 2024. The bank expects the city to record 3.3 percent economic expansion in 2023.

Although think tank Oxford Economics still sees Hong Kong continuing to evolve and strengthen its role as a gateway between the mainland and the world, it will have to struggle to maintain economic growth amid external headwinds and fiscal drags. The challenges ahead include net population outflows and an aging population that will put a strain on labor supply; higher interest rates and elevated corporate debt that depress investment spending; global growth uncertainties; and growing competition from other financial hubs, notably Singapore.

"The economic shocks of the past four years will leave behind permanent scars, and we expect real GDP growth of just 2.6 percent year-on-year from 2025 to 2029 - down from 3.4 percent recorded from 2010 to 2018," says Oxford Economics senior economist Lloyd Chan.

Realty sector
A subdued economy, along with rising interest rates, and an oversupply of residential flats will further squeeze the local residential property market.

"Economic softening, together with higher interest rates, are pulling down home prices and dampening demand. Hong Kong homeowners' mortgage burdens have climbed sharply," says S&P Global Ratings credit analyst Edward Chan.

S&P Global Ratings anticipates Hong Kong home prices will drop 5 to 10 percent in 2024, and primary transactions to remain at 11,000 to 13,000 units - far below the 15,000 to 21,000 primary units transacted annually between 2017 and 2021.

The US-based credit agency, however, sees the transaction volume climbing moderately on the back of the recent cut in local stamp duties on properties. "Strong real demand could put the brakes on the downturn," says S&P Global Ratings credit analyst Lawrence Lu. "We believe prospective homebuyers are just reluctant to come in at this juncture. But the current turbulence would have to last longer and exceed our downside scenario to fundamentally erode residential property demand in Hong Kong."

UBS forecasts Hong Kong residential property prices to fall 10 percent in 2024, as the positive impact from interest-rate cuts could be felt only in the latter part of this year. The key risks are weakening macroeconomic conditions; a gradual increase in new housing supply; and the return of higher interest rates.

John Lam, UBS head of China and Hong Kong property research, explains that the total inventory of firsthand spot and presale properties would take four years to digest. "And, amid high interest rates, developers with high debt ratios may need to cut prices."
While UBS Hong Kong real estate analyst Mark Leung is not worried about systemic risks in the property sector, he says that if home prices were to fall by 10 percent, the number of negative equity cases would inevitably go up, and could hit historic highs.
Joseph Tsang Hon-ping, chairman of Jones Lang LaSalle in Hong Kong, suggests that the SAR government remove all cooling measures to give the residential homes market a shot in the arm, as the global real estate advisory firm believes that mass residential home prices would decline by 10 percent in 2024, reaching levels last seen in 2016.

"The weakening property market will negatively impact the city's economic growth and consumer spending. It will also depress the government's land revenue, which is a major source of income. The government should revise its housing policies to support the residential market," Tsang says.

The private residential price index tracked by the Rating and Valuation Department dropped nearly 5.6 percent in the first 11 months of 2023, reaching the lowest price level seen since February 2017. If compared with the historic high point recorded in September 2021, home prices in Hong Kong have plummeted 20.62 percent.

Stock market
With weak economic growth prospects in Hong Kong and on the mainland and US interest rate hike movements, Hong Kong's equity market benchmark Hang Seng Index registered a four-year losing streak from 2020 to 2023. Last year, the HSI fell 13.8 percent, the worst performance of any major Asia-Pacific market. The Hang Seng China Enterprises Index was down 14 percent, while the Hang Seng Tech Index also lost 8.8 percent.

According to the World Federation of Exchanges, Hong Kong was the eighth-largest stock market in the world as of November, trailing the New York Stock Exchange, the Nasdaq Stock Market, Euronext, the Shanghai Stock Exchange, the Japan Exchange Group, the Shenzhen Stock Exchange, and the National Stock Exchange of India. The Indian stock market took over Hong Kong's seventh position that month, based on market capitalization value levels.

CCB International chief strategist and managing director Zhao Wenli predicts that the HSI will hover around 16,500 to 20,500 this year, as the local stock market has shown clear signs of reaching a mid- to long-term bottom, based on valuation and liquidity indicators.

The equity market will show a W-shaped upward trend, while the share market will face risks mainly in the first half of 2024. The stock market's performance will be weaker in the earlier parts of the year before valuations and corporate earnings gradually recovering, Zhao says.

The equity strategist argues that the market needs favorable policies and support from economic fundamentals to unlock upward potential in the future, while the market may be pricing in an overly optimistic scenario for US growth and the US Federal Reserve's potential rate cuts in 2024.

Alan Luk Ping-kwan, Futu Securities Hong Kong's chief strategist, says the HSI may see its lows in the first quarter of 2024, but there is a possibility of an upward trend in the second and third quarters.

UBS expects the HSI to hover around 20,600 in 2024, based on the projected 2025 forward price-earnings ratio of nine times multiple. The Swiss investment bank says investors should be aware of changes in Hong Kong and mainland macroeconomic conditions and the US interest-rate environment, as well as regulatory and political risks when investing in Hong Kong shares.
UBS Hong Kong strategist Angus Chan recommends that investors adopt a defensive approach for Hong Kong equities in the first half of this year.

"We prefer travel-related companies and Macao gambling stocks that have benefited greatly from the resumption of normal travel, as the pace of recovery has been above expectations. We continue to favor high dividend yield stocks, such as infrastructure plays, in view of market volatility and macro uncertainties," Chan says.

He adds that investors should avoid Hong Kong property and bank stocks, as these equities are heavily influenced by interest-rate movements.

IPO outlook
The plunge in the city's equity market capitalization is also accompanied by a shrinking initial public offering business, dented by the escalation of geopolitical risks, such as the conflicts in Ukraine and in Gaza; continued interest-rate hikes by the US Federal Reserve and other central banks; and the weaker-than-expected economic rebound on the mainland.

Hong Kong Exchanges and Clearing attracted 73 new listings with a total value of HK$46.3 billion ($5.92 billion) in 2023, compared with 90 listings that raised HK$104.6 billion in 2022.

Refinitiv says Hong Kong stock exchange's IPO ranking sank to eighth in 2023.

But global business advisory firm Deloitte expects the local IPO market to be vibrant and robust in 2024. "If liquidity, including funds from Europe, the US and the Middle East, can be redirected to Asia, augmented by numerous new regimes, reforms and promotions for the capital market introduced by the Hong Kong Stock Exchange and the HKSAR government's measures in enhancing stock market liquidity, this should help improve market liquidity and valuation," says Edward Au Chun-hing, Deloitte China southern region managing partner.

These IPO market reforms include the listing regimes for special purpose acquisition companies and specialist technology companies (that can apply for a listing on the main board even if they do not satisfy the usual profits, revenue and cash flow listing criteria); the introduction of FINI (Fast Interface for New Issuance); memorandums of understanding with overseas exchanges; and growth enterprise market reform - new streamlined transfer mechanism for eligible GEM companies to be transferred to the main board.
Deloitte sees Hong Kong attracting a record 80 IPOs in 2024, raising HK$100 billion, while PricewaterhouseCoopers predicts Hong Kong will return to the top three global financing markets this year.

"Hong Kong's IPO business could rebound after being in the doldrums in 2023, with mainland regulators more willing to approve overseas IPOs, the inclusion of foreign companies in the stock connect programs, lower hurdles for high-growth technology firms, and the homecoming of US-listed mainland firms, all of which will contribute to Hong Kong's IPO pipeline," says Sharnie Wong, senior industry analyst at Bloomberg Intelligence.