Hang Seng index could start a rebound after prolonged consolidation
HANG SENG INDEX OUTLOOK: BULLISH
- The HSI underperformed its global peers amid tech clampdown and economic slowdown
- Easing real estate rules and lower borrowing costs could boost market confidence
- The HSI breached above a “Falling Wedge” pattern, opening the door for further gains
Hong Kong’s Hang Seng Index (HSI) could take a significant move rebound after a long period of consolidation. It was among the worst-performing indexes in the world last year, partly due to a severe technological crackdown and a slowing economy. While the S&P 500 index has gained 17% over the past 12 months, the HSI has fallen more than 18% (chart below). This could make the HSI attractive to value investors looking for a bargain over the medium to long term.
The price-to-earnings ratio (P/E) of the HSI fell to 9.8, against 23.6 that of the S&P 500 index and 34.3 that of the Nasdaq 100 index. Its P/E ratio is also lower to the five-year average of 10.86. A relatively cheap valuation can cushion downside potential in the face of external headwinds.
Hang Seng Index vs. S&P 500 Index – 12 Month Performance
Chart created with TradingView
There are some positive catalysts at the start of the year. Chinese authorities have drafted rules to give property developers greater access to blocked funds, providing them with crucial help to deal with their debts. The loosening of ownership rules has raised hopes that policymakers will also loosen rules on the tech sector, easing pressures on stocks such as Tencent, Ali Baba and Meituan. Their stock prices fell sharply last year after authorities tightened their grip on tech companies, accusing them of monopolistic practices. Alibaba has lost more than 60% of its market value from its all-time highs, and the stock may be overly penalized due to its fundamental and dominant position in China’s e-commerce market.
Additionally, the PBOC cut borrowing costs for a second straight month in January, cutting the 1-year MLF rate by 10 basis points. This indicates that the world’s second largest economy is entering a cycle of monetary easing as inflation in the country begins to subside and economic growth slows. Contrary to the majority of Western countries which are tightening their monetary policy to contain inflation, China is doing the opposite. The policy divergence is making Hong Kong stocks more attractive than before to global investors.
High Constituents in the Hang Seng Index by market capitalization
Source: Bloomberg, DailyFX
BLOCK SENT INDEX TECHNICAL ANALYSIS
The Hang Seng Index (HSI) exceeded one “Falling corner” on the upside, opening the door to further upside potential. The “Falling Wedge” is usually a bullish trend reversal pattern, which sets the stage for a strong technical bounce after a long period of consolidation.
The index also likely formed a “Double bottomChart pattern with strong support found at 22,800. The “double dip” is also a common bullish trend reversal pattern, suggesting that selling pressure may wear off after prices hit “bottom”. ” twice.
An immediate resistance level can be found at around 24,900 – the 127.2% Fibonacci extension. A breach above this level may expose the next resistance level of 25,600. The MACD indicator is trending higher above the neutral midpoint, underscoring the bullish momentum.
VSheart created withTradingView
— Written by Margaret Yang, Strategist for DailyFX.com
To contact Margaret, use the Comments section below or @margaretyjy on Twitter